What is Private Funding
Private funding is when a group of private investors put up capital so that a customer can purchase Capital Equipment such as Trucks, Earthmoving Equipment, Farm Machinery and similar type assets.
Banks on the other hand are able to lend money to their clients due to the fact that their customers deposit funds into savings accounts, in addition to sourcing funds from the money markets.
Banks generally have an endless supply of funding to offer their customers, whereas private funders have a limited amount of funds. Banks operate on economies of scale, ie a large number of people depositing funds into savings accounts and good a credit rating to purchase money on the money markets. Private funders access money from a small pool of wealthy Australian Investors, looking for a higher return on their investment.
Given the fact that private funders have access to a smaller pool of funding, truck finance approvals generally don’t exceed $250K per client and only a specified number of settlements can occur in one month. Once the allocated funds have been used up, no more settlements can occur until the following month.
How to access a private funder
Unlike making an appointment with your local bank to discuss Equipment Finance options, consumers can only gain access to private funding through specialist Equipment Finance companies such as Heavy Vehicle Finance. Private funders don’t have a shop front presence and only deal with people that specialise in Heavy Equipment Finance and are part of a tight nit professional community. Given the small number of private investors in Australia, access to private funding is reserved for only a small number Australian businesses – often people are not aware that private funding exists.
How do private funders differ from banks and other financial institutions?
Private funding allows businesses the ability to borrow funds when other traditional funding avenues have been unsuccessful – ie bank funding.
As a general rule, when a large bank is looking at a deal relating to Equipment Finance, the following conditions need to be met before a finance approval can be issued;
- Business established for 2 years
- Accountant prepared financial statements for the last 2 financial years
- Asset to be no older than 5 years old at time of purchase
- Cashflow projection, business plan and upfront cash deposit – if new start venture
- No credit defaults against a client’s credit file
- No ATO taxation arrears
However, when a private funder looks at a deal relating to Equipment Finance, the following conditions are generally all that is required for a finance approval;
- Last 3 months bank statements on clients business trading account
- Goods can be older than 5 years old at time of purchase
- To mitigate the requirement of an upfront cash deposit – collateral security can be taken over another asset owned by the client or a caveat taken over property
- Clients with credit defaults are still eligible for finance
- Clients with ATO arrears are still eligible for finance
The criteria for a private funder is nowhere near as onerous as what is expected from the banks. Therefore, private funders are able to provide approvals for Heavy Equipment Funding, when the banks have declined their application.
When dealing with a private funder, clients need to be aware that things take longer than other channels of Equipment Funding. Banks have access to a great deal more resources than that of a private funder. For instance, Banks have thousands of employees processing multiple deals on a daily basis, however a private funder might only have a team of 10 people. Given the smaller workforce, private funders take longer to assess and settle deals relating to the purchase of Trucks or related type equipment.
The rate offered by private funders is higher than that offered by the big banks. However, private funders do deals that are perceived to be high risk and therefore the private investors require a higher return on their investment – high risk high return principal.
Having said this though, the interest rate through private funding is not too high, that it would cripple a Transport Company or an Earthmoving Company. Typical rate for most private funding deals is around the 13% mark. Even though rates are higher than other funders, the actual monthly payment on the equipment may not differ that greatly.
Finance Amount – $100,000 (gst inc)
Bank monthly payment – approx $2,000 per month
Private funder monthly payment – $2,300 per month
What customers need to look at, is what the monthly payment is against how much the equipment will earn them. Some consumers refuse to use private funding based on the fact that the rate is where it is – even after they have been declined through a bank or other financial institution.
Using the above funding example of $100K;
If a business cannot purchase an additional Truck or item of Capital Equipment required to increase turnover by approx $200K per annum – they would be restricting their ability to grow through increased turnover and access to additional work sources.
Clients should also consider the fact that Chattel Mortgage Loans offered through a private funder have a number of tax benefits, that would reduce the amount of tax paid at the end of the year. Ie, depreciation and interest is claimed as a tax deduction on the clients profit and loss statement at the end of the financial year and the gst is claimed as an input tax credit during the lodgement of the next quarterly business activity statement (after the purchase of the goods).
This means that consumers should look beyond comparing the monthly payments between a private funder and a large bank, given the fact that there could be other factors to consider – such as forgoing potential increased income, tax deductibility and increasing the equity in their business.
In conclusion, private funding for Truck Finance or Heavy Equipment Finance plays a large role in supporting Australian Businesses that have not been able to secure funding from big banks or other financial institutions. Private funding allows customers to grow their business at critical times during their life cycle, allowing them to maximise turnover and increase equity in their business.