One of the most important aspects of any business is maintaining strong cashflow. It looks great to see your financials at the end of the year showing a healthy profit margin, but that doesn’t really tell the full story. What really counts is the week by week and month by month cashflow of the business – making sure you have enough money to pay accounts, finance payments, wages and other expenses on time. Because of this I’m a firm believer in matching your finance payments to your income.
This is an often overlooked area of equipment finance structuring. When I first got into this business I worked for a company that primarily did equipment finance for rural clients. These clients ranged from graziers selling cattle every 6 months, to cotton harvesting contractors who received all of their income in a 4 month period each year. And then there were the grain growers who would have a fantastic crop one year but were not sure what the next year could bring.
To these clients it made clear sense to structure the payments on their loans to suit the timing of their income. For the cotton harvester, we would structure the payments to be made in August to December of each year, for example, with nothing to be paid for the remaining 8 months. For the grain grower we would do a 1 year term so that each year we could determine how much he could pay. The flexibility that this approach gave them was the reason why they rarely struggled with payments, and allowed them control their cashflow.
What about now when we have wet seasons between Dec to March …why not structure your payments to have NIL payments during these months if you are in transport or earthmoving.
There is an endless array of payment structures available to suit your business, some of the more common ones are:
• Annual in Advance – payments are made in one lump sum at the start of each years starting at settlement. This can result in some substantial savings as the interest is being calculated on a lesser amount from day 1.
• Semi-annual in Advance – payments are made every 6 months from settlement which results in similar savings to annual payments.
• Quarterly in Advance – payments made every 3 months. This one can also be used to ensure you make the most of GST input tax credits.
• Seasonal – this structure involves making the majority or all of your payments in certain months of the year. The cotton structure above is a good example
• Stepped payments – In this case a new piece of equipment may have a long lead time to produce income. In this case the payments can be structured as smaller and more affordable payments initially with payments increasing once the income stream is established.