Back in business: How has equipment finance fared?

WWhen the government amended the instant asset write-off scheme last year, many in industry were concerned that asset finance flows would dry up.

During the 2023 financial year, for example, almost two-thirds (63 per cent) of SMEs took advantage of the $150,000 instant asset write-off threshold ahead of its expiry, according to data released by debtor finance lender ScotPac.

Speaking earlier this year, ScotPac chief executive Jon Sutton says the larger write-off had been a major factor in SME decision making on capital expenditure in recent years.

“There is no doubt the instant asset write-off scheme has achieved its objective of encouraging SMEs to invest in assets to help grow their business,” Sutton says.

“In raw numbers, hundreds of thousands of SMEs were able to claim tax relief worth billions of dollars for assets purchased in 2023–24.

“When you consider the rising costs faced by all businesses in that period, including the cost of critical assets, the Instant Asset Write-off scheme has provided a great boost for SMEs.”

For this financial year, a $20,000 cap applies on an asset-by-asset basis, while assets valued at more than $20,000 (which cannot be immediately deducted) can be placed into the small-business simplified depreciation pool and depreciated at 15 per cent in the first income year and 30 per cent each income year thereafter.

But because the write-off can be used multiple times, this has seen businesses look to take advantage. Indeed, demand for equipment and asset financing from Australia’s small- to medium-sized enterprises (SMEs) has been steadily on the climb over the last financial year.

Plus, the fact that the scheme’s threshold will revert to $1,000 in FY25 unless the government introduces further alterations to the scheme (which could potentially be announced in the government’s upcoming budget), there may be a last-minute rush from SMEs to take advantage of the higher threshold in the remaining few months of this financial year.

According to the latest Banjo Barometer report for 3Q24 released by Banjo Loans, demand for equipment and asset finance appears to be on the rise, particularly in Queensland and Western Australia.

The SME lender’s SME Compass report also found that asset finance was helping businesses grow, with 61 per cent of the SMEs that hit their revenue targets in 2023 having purchased assets in the year.

“Some people just don’t realise the range of things you can finance; from big coffee machines in cafes, to IPL machines, big Tonka trucks on the mines, farm machinery (and some of it is bespoke machinery that’s made specifically just for that particular farm)…,” she says.

“I’ve done some really eclectic lending for asset finance and we’re able to do it if it just has some sort of serial number or VIN number or some identifier,” she says, adding that she also recently financed some scaffolding for a client.

“The majority of loans that we’re writing at the moment is consumer; probably 70 per cent is consumer (refinancing and cars) and then the remainder are the unusual asset finance things.”

Adding to this, non-bank lender Pepper Money’s general manager asset finance Ken Spellacy says the lender was seeing “robust demand” for equipment, vehicles, and machinery, suggesting that several factors were contributing to this demand.

“We’re seeing more favourable interest rates which have been encouraging financing activity; some segments of construction and manufacturing are still experiencing growth, and we are seeing general resilience in the mining, agriculture, and logistics space,” he tells The Adviser.

“There is also most likely some post-pandemic economic recovery still occurring, with businesses strategically buying assets to boost productivity and drive growth.”

Asset finance specialist and principal of iFin Capital, Nathan Hogan, adds that there is also a growing interest in sustainable financing options, with many businesses now seeking to invest in environmentally friendly projects, new equipment, and new technologies.

“It is likely that these trends will continue as technology advances,” Hogan says.

“SMEs will continue to prioritise flexibility in financing as environmental sustainability becomes a more significant consideration for businesses across multiple industries.”

Non-bank lenders driving asset finance

In this unpredictable economic environment, small businesses may face challenges when it comes to securing capital in order to invest in equipment, particularly from some of the mainstream banks.

Hogan explains: “With economic uncertainty and evolving market conditions, SMEs may face challenges in accessing traditional financing options, making alternative lenders in equipment finance an attractive option for funding capital expenditures.”

He tells The Adviser that lenders are beginning to offer more online application processes and “streamlined approval workflows” as digitisation and automation take a foothold in the space, as well as innovative products.

“We have continued to see an increased demand for flexible financing solutions tailored to the needs of SMEs, including structured payment options in line with cash flow trends, equipment rental agreements, and vendor financing programs,” he says.

Indeed, Spellacy states that Pepper Money aims to make the most out of asset finance opportunities through close collaboration with brokers.

“Consistent feedback from our broker partners has always been: ‘make it easy for me to do business’ and that feedback sits at the heart of everything we do,” Spellacy says.

“We are clear and consistent about our appetite and service levels, with the aim to provide certainty for our brokers. “We support the broker through the life cycle of the customer providing retention opportunities to the introducing broker when a customer is considering buying a new asset, or at key milestones in the contract term.”

How can brokers write more asset finance?

With the EOFY fast approaching, many SMEs are expected to utilise their instant asset write-off and turn to brokers for help in financing their asset finance needs.

Indeed, according to Banjo’s 2024 SME Compass report, 53 per cent of SMEs expect to purchase new equipment/assets in the next 12 months.

Pepper Money is also expecting to see a rise in equipment finance demand this year, with Spellacy telling The Adviser: “As we fast approach the end of the financial year period, the impact of the tax write-off scheme will come into play.

“Although the current tax write-off scheme is less favourable than what business could access in 2023, we are seeing some significant improvement in other factors, such as interest rates easing, and inflation being at lower levels compared to the same period last year.”

Similarly, Sutton says brokers were well placed to help SME clients gain the most from the FY24 write-off.

“Regulatory change creates opportunities for experts like brokers to help their clients understand their suite of options when it comes to acquiring assets,” he tells The Adviser.

As such, brokers will likely benefit from liaising with their SME clients’ tax accountants.

Hogan emphasises that independent tax advisers play a “critical role in maximising tax benefits and incentives available to businesses through equipment finance”.

“They can provide valuable insights into tax planning strategies, depreciation schedules, and tax implications associated with asset acquisitions,” Hogan says.

“By collaborating with tax advisers, businesses can optimise their financial decisions, minimise tax liabilities, and ensure compliance with relevant tax laws and regulations.

“Our goal is to provide SMEs with access to competitive financing options that support their growth and success while minimising financial risk.”

Top tips for writing asset finance

Taking the time to truly understand the needs of the client and considering factors such as the type and cost of equipment, cash flow projections, and risk tolerance is a key part of the process for Hogan and iFin Capital.

“Based on our assessments, we develop a tailored financing package that aligns with the client’s budget, objectives, and timeline,” he says.

“We work closely with our network of lenders and financial institutions to secure competitive loan terms and favourable interest rates for our clients.”

According to Hogan, ensuring a “seamless financing experience” comes through maintaining open communication with the client and providing regular updates and guidance throughout the process.

Moreover, Fleck’s advice to brokers beginning their journey into the equipment and asset financing sector is to delegate to specialists and undertake training.

“Get somebody to help you. Don’t be afraid of handing stuff over and be accepting that people can do things just as well as you can,” Fleck says.

“Make sure you get a fabulous mentor and ask questions; don’t be afraid to ask even if you think it’s a silly question.

“And don’t go telling your clients an answer if you don’t know the answer! Clients will always be happier being told, ‘I don’t know the answer to that but I will find out and I’ll get back to you’. Just be honest.”