When Business Owners are looking to purchase an additional drill rig for their business, they need to consider drilling rig finance for a new or second hand unit. On face value, it may be thought that financing a second hand unit could be the cheaper option, however this may not be the case.
If a new or late model rig was to be financed, the following benefits should be taken into consideration;
Higher depreciation can be claimed on a newer rig, compared to that of an older rig. Given the fact that such equipment is considered 100% business use, client can claim 100% of the depreciation. A late model rig will have a higher depreciation value for two reasons;
1) A rig that is say 10 or 15 years old, might have passed its useful life whereby depreciation can still be claimed – whereas a newer machine will have a longer useful life
2) A newer rig will have a higher purchase price, which means a larger depreciation value can be claimed
Ultimately, by maximising the depreciation of the equipment, a company will save in company tax paid to the ATO.
A newer rig is less likely to incur large and ongoing repairs and maintenance, therefore reducing this expense for a drilling rig company. Moreover, if a rig is broken down, it is not working and generating money for the company – hence reducing turnover and even jeopardising an existing work contract.
Drill Rig operators should also consider, that sourcing parts for an older machine can be difficult and costly and may take time to arrive in the country – therefore extending the downtime of the machine.
Lower Interest Rate
The interest rate obtained when financing newer equipment is lower than the interest rate obtained on an older machine. The rationale to offer lower rates on newer equipment is as follows;
1) older machines have a higher risk profile. If an older rig was sent to auction, the likely hood of recouping costs to cover the loan is diminished – as there will be fewer people putting in serious offers on dated equipment
2) the higher the loan amount the lower the interest rate offered – like bulk buying discount.
A balloon payment can be applied on new rigs or rigs up to 5 years old at time of purchase. By applying a balloon payment, monthly payments are reduced over the life of the loan – therefore maximising cash flow for a business
Reduction in Lost Revenue
Older machines could have a propensity to break down on site, therefore shutting down production. Every day that the site is shut down, the business will be incurring a loss. A new machine with warranty is less likely to break down and shut down production. If it does, a technician form the manufacturer is rapidly dispatched to the job site, so the rig can be immediately repaired. As this is the case, loss of income on a protracted basis is mitigated with the purchase of a new drilling rig.
Longer Loan Term
New drill rigs or rigs up to 5 years old can be taken over a 5 or 7 year term, compared to an old machine that might need to be amortised over 3 years. By having a longer loan term, could mean that the monthly payment on a newer machine is lower than the monthly payment on an older machine
No Valuation Costs
When a business is looking to finance an older drilling rig, more often than not, the client will have to pay for a professional valuer to inspect and value the equipment. If the rig being purchased is new, no valuation would be required and therefore saving the customer approx $2,000 in professional valuation fees. Valuation prices vary, based on the location and the number of goods to be inspected – the valuation fee could rise to $7,000.
Moreover, if the valuation comes back lower than the purchase price of the drill rig and associated equipment, the client will need to make up the difference by way of cash deposit or collateral security over other unencumbered equipment. An example of this is, purchase price of $350,000 (gst inc) and the valuer attaches a combined market value and auction value (an average is taken of both market value and auction value) of $300,000, the client would need to contribute an additional $50,000 to the transaction.
Heavy Equipment valuers, generally put down conservative valuations on equipment, so that if in the event the item is repossessed and sent to auction, that the finance company recoups sufficient funds to cover the outstanding debt.
Most private sales for second hand rigs will require a professional valuation to be completed, thus exposing client to a potential shortfall in access to suitable funding.
Fast Turnaround Times
Obtaining finance approvals for new rigs is quicker than the for older drill rigs. This means that a client can seek immediate finance approval to secure a new rig required to facilitate work on a new contract. New rigs purchased through dealers require no inspections or valuation and can settle in a couple of days.
An older rig on the other hand could take up to 3 weeks to settle, based on the fact valuations could be required on the equipment being purchased and the equipment being offered as collateral security.
The above factors should be considered by any business before making a decision about financing a new drill rig compared to an older drill rig. It is also advised that a drill rig company should discuss all the taxable benefits of purchasing new compared to old with their accountant or financial advisor.
On face value, many operators think that they are saving money, by purchasing a cheaper / older machine. However, the below example compares a possible scenario between financing a newer drill rig compared to an older rig.
New Drill Rig
Purchase Price – $850,000 (gst inc)
Interest Rate – 4.20%
Type – Chattel Mortgage
Term – 60 months
Balloon – $250,000 (gst inc)
Payments – $11,937 per month
15 year old Drill Rig
Purchase Price – $300,000 (gst inc)
Interest Rate – 9.75 + risk premium
Type – Chattel Mortgage
Term – 36 months
Balloon – NIL
Payments – $10,676 per month
Above is an example only and will differ from applicant to applicant. It does however show that potentially purchasing a new machine compared to an old machine can have similar monthly payments. If then you consider the reduced tax paid to the ATO, reduced down time, reduced maintenance costs – it is quite possible that purchasing a new rig is way more beneficial for a business compared to purchasing an old rig.
To discuss any funding scenarios relating to new or used drilling rigs, contact Heavy Vehicle Finance on 1300 788 740 or head to our website www.heavyvehiclefinance.com.au and navigate to our drilling rig finance page – Equipment Finance > Mining Equipment Finance > Drilling Rig Finance.