What is capital lease finance?
A capital lease is a commercial finance product that enables a financier to purchase energy efficiency equipment on behalf of your business. The business makes regular payments to the financier to lease the equipment but, as the payments are considered instalments, the business owns the asset for accounting purposes.
How can capital lease finance help your energy efficiency project?
No upfront capital or security
Capital leases allow for energy efficiency projects to be undertaken without a business requiring upfront 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 financing costs.
Tax and accounting
As the business is considered to be the owner of the asset for accounting purposes. The business may be able to claim depreciation of the asset. Further, the interest payable on the debt may be deductable at the 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.
What are the steps to getting capital lease finance?
- Undertake an energy audit: This will help your business identify actions and equipment 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 to undertake works 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: Ask your accountant if you can depreciate your asset 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 the terms of the loan, such as interest rates, the minimum and maximum loan amounts and repayment frequency.
- Apply for capital lease: Select a preferred financier. Secure the finance and arrange for the contractor to carry out the energy efficiency 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.
Capital lease financiers
The Clean Energy Finance Corporation (CEFC) has developed a capital 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 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.