What is operating lease finance?
An operating lease is a commercial finance product that enables a financier to purchase energy efficiency equipment and then rent it to your business. You pay regular instalments to the financier. As the instalments are considered rental payments, you do not own the asset. Once the final lease payment has been paid, you take ownership of the energy efficiency equipment.
How can operating lease finance help your energy efficiency project?
No upfront capital or security
Operating leases may allow energy efficiency projects to be undertaken without a business requiring up-front capital or using existing business assets as security.
Realising savings now
Businesses that use finance for their energy efficiency projects can realise immediate cash flow benefits. Energy efficiency projects can result in higher savings than loan costs.
Tax and accounting
The financier owns the asset resulting in an off-balance sheet finance arrangement for your business. The business pays instalments back to the financier which may be deductable at the company tax rate. Note that the change to the Australian Accounting Standard will result in all operating leases coming on-balance sheet as of 1st January 2019. It’s important to seek specific advice from your tax professional.
Things to consider
As the business is considered the owner of the asset, the business bears the risk associated with owning the asset.
What are the steps to getting operating lease finance?
- 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 operating 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 in order to determine your after-tax position for the project.
- Seek finance quotes:Seek finance quotes from financiers a link to some has been provided below. Understand the term of the loan, requirements for capital or security, requirements to disclose your business’s financial statements, interest rates, the minimum and maximum loan amounts and repayment frequency.
- Apply for operating lease: Arrange for finance quotes and select a preferred financier. Secure the finance and arrange the contractor to undertake the works.
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 ESI website.
Visit victorianenergysaver.vic.gov.au for more information.
Operating Lease Financiers
The Clean Energy Finance Corporation (CEFC) has developed an operating lease finance offering with co-financiers which specifically targets the energy efficiency needs of small businesses, manufacturers, the agricultural sector and small-scale commercial property.
Capital lease finance identifies technologies that meet the CEFC’s investment guidelines and offers an operating lease with 0.7% discount comparable to standard operating 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.