What is hire-purchase finance?
Hire-purchase is a commercial finance product that enables a financier to purchase energy efficiency equipment on behalf of your business. The financier agrees to give you use and possession (hire) of the equipment in return for regular instalments. Once the final payment has been made to the financier the customer takes ownership of the energy efficiency equipment.
How can hire-purchase finance help your energy efficiency projects?
No upfront capital or security
Hire-purchase allows for energy efficiency projects to be undertaken and may require some upfront capital or security of existing business assets. This may assist your business in accessing finance for future business growth over a longer term.
Realising savings now
Financing energy efficiency projects can result in immediate cash flow benefits for the business. Energy efficiency projects can result in higher savings than loan costs.
Tax and accounting
The financer owns the asset resulting in an off-balance sheet finance arrangement for your business. As your business pays instalments back to the financier, these payments may be deductable at your company tax rate. Seek specific tax and accounting advice for your particular situation.
Things to consider
As the business is considered the owner of the asset, the business bears the risk associated with owning the asset. Hire-Purchase finance may be more appropriate for larger equipment that is easy to remove and where costs are predominately for physical assets.
What are the steps to getting a hire-purchase?
- Undertake an energy audit: This will help your business identify actions that will improve energy efficiency and reduce operating costs. Work with your energy assessor to determine the likely energy (kWh/MJ) savings per year for each recommended action.
- Seek quotes: Seek quotes from qualified contractors for actions recommended in the energy audit.
- Identify annual cost savings: Once the energy savings have been identified, calculate cost savings, taking into account consumption and demand charges. This allows you to determine the expected annual cost savings.
- Calculate finance terms: Understand the length, repayment frequency and expected interest rate of capital lease finance. This will help you forecast finance costs and determine if the savings of the project are equal to or exceed the finance costs.
- Determine tax treatment: Discuss how to depreciate your asset with your accountant to determine your after-tax position for the project.
- Seek finance quotes: Seek quotes from financiers, a link to some has been provided below. Understand term of the loan, requirements for capital or security, requirements to disclose your business’s financial statements, interest rates, the minimum and maximum loans and repayment frequency.
- Apply for hire-purchase: Arrange for finance quotes and select a preferred financier. Secure the finance and arrange the contractor.
Finance and Government Subsidies
Businesses can also receive a discount on energy efficient products that are installed by accredited Victorian Energy Upgrade (VEU) providers. A list of these products and providers can be found on the VES website.
Visit victorianenergysaver.vic.gov.au for more information.
The Clean Energy Finance Corporation (CEFC) has developed hire-purchase finance offering with co-financiers which specifically targets the energy efficiency needs of small businesses, manufacturers, the agricultural sector and small-scale commercial property.
Hire-purchase finance identifies technologies that meet the CEFC’s investment guidelines and offers a capital lease with 0.7% discount comparable to standard capital lease products. This program is offered by a range of financiers. Visit https://www.cefc.com.au/where-we-invest/asset-finance.aspx for more information.