Equipment financing experts' insights for businesses in 2023

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Have rising interest rates and inflation led you to question if investing in assets is a good idea? You are certainly not alone. This week, we spoke with George Rikiti, an expert on equipment financing, about the current economic climate, how it affects Australian businesses, and his advice for businesses trying to navigate the current economic climate.

Introduce yourself and tell us a little about your background

My name is George Rikiti, and I'm currently the managing director for a company called Gear Select. I've been in the finance game now for about 30 years across a number of different financiers. And hence why I'm considered to be marginally a bit of an expert on this topic.

What is the current state of the economic climate in Australia?

We're in a very unique situation from an economic standpoint. What you're seeing is interest rates rising as the Reserve Bank has taken a stance to try to bring inflation rates down. So you've got these interest rates going up, but at the same time, post-COVID, we're also seeing equipment prices going up as a result of supply chain issues. A lot of businesses are in this situation where they're trying to figure out, “do I invest now, given that there are a couple of headwinds that we haven't seen for a long time within the economy? The thing is that it's not only unique to Australia, it's happening globally. It's a bit of a global phenomenon.

What is the inflation situation?

What we're seeing, and what you'll hear if you watch the news and listen to all of the politicians and the Central Bank, or the Reserve Bank, is that inflation is high. So when you look at inflation, it's basically a measure of all of the goods and services that are typically purchased by either individuals or businesses. And it measures the rate of change compared to the previous quarter and an annual rate is applied. In a healthy economy, the central bank and government would normally like to keep inflation at 3%. At the moment, we're running at around the high sixes, heading into the sevens. In terms of inflation, we are at least twice where we should be.

Why are interest rates rising?

The Reserve Bank has taken the stance of increasing rates from where they were two years ago, at just above 0% to 2.85%, and they are talking about it going up another per cent to try and put the brakes on inflation and bring that back.

Those who have debt or mortgages have less disposable income, and those looking to take on debt are being deterred by the interest rates. The strategy is certainly to slow down spending rates and, in turn, bring the inflation rate back. That's what the name of the game is. And typically, in normal economic conditions, that would work.

Why is it not working? What other factors are causing inflation?

What we're seeing at the moment is that it's not just being led by people spending. There's also a supply chain issue. People can't control that. So whether it's fuel, the Ukraine war, or supply chain issues, well, then it's actually not being led by people pushing and overspending and feeling buoyant about the situation. It's more around supply chain issues that are impacting the price.

What issues are most businesses going through right now due to high inflation and interest rates?

If you're in business, what's happening at the moment is that you're seeing a lot of cost inputs increase. If you're looking at buying new equipment, supply chain issues are pushing the prices up, and they're sitting somewhere between 5% and 15%.
Looking at financing, the cash rate has gone to 2.85%. So if you bought a forklift 12 months ago for $35,000 on a five-year 20% balloon structure, you would've been paying around $565 per month. Now, you're looking at $625. So that's an additional $60 a week. Over a five-year term, that's about $3,600.
Again, if you've got bigger pieces of machinery and you're talking about $100,000 to $200,000, certainly that's an increased cost, both to actually purchase the machine, and to fund it.

Many businesses will be considering the cash flow that repays that increased cost. Do they have a secure contract that will cover it?
The other thing is, if you've got an aged piece of equipment, what's the maintenance cost on that versus upgrading to a new machine? Even with the increased interest rate, it may still work out to be more economical to purchase, as the maintenance costs may have increased due to growing labour costs.

Is there a better financing option than others in this current environment? Such as rental before purchase, chattel mortgage or increased balloons.

I believe now is a really good time to take a balanced approach. Every business is different. But certainly, the advantage of taking out a loan facility now, even though the rates might be higher, is that you will get to lock your interest rate in for the next five years. So, with a little bit of uncertainty about where rates will go and all projections indicating that they will rise, now is a good time to lock them in. I also think when you're looking at forklifts at the moment as an asset, they do have a long effective life. Typically, if they're well looked after and well maintained, they can last anywhere from 10 to 15 years.

If you're considering taking out a loan, you could consider a slightly higher balloon payment. So if you would normally take a 20% balloon at the end of time, current equipment values are very strong at the moment. That's not to say that they would be in five years, but you could take a 30% balloon, and that could keep your repayments down as well. So there are certainly some ways to counter the current environment, whether it be from a cash flow perspective or from a risk perspective. But again, each business has different things to consider when making financing decisions.

What are your top tips for businesses for 2023?

1. Be agile

I think the top tip that I could give a business owner at the moment is that you need to be agile. Because three years ago we weren't thinking about things like, okay, lockdowns. We weren't thinking about things like supply chain issues. We weren't thinking about inflation rates going to 7%, and we would never have considered the reaction we would get from governments and the Central Banking System globally. We don't know what's next. I think businesses have to look at what they're good at and who their end clients are, particularly if they're going to be impacted by interest rates going up. Then being able to take stock and build a strategy around diversifying, consolidating, or both.

2. Examine Asset base structure

The second would be to look at what your asset base looks like right now. One of the positive things to come out of supply chain issues is that equipment values have gone up. So, if you have a lot of used equipment in your business or fleet, your balance sheet has actually increased in value. So what can you do with that? I think that's something that people should be investigating.

If you've got a million dollars that were sitting on your balance sheet last year, it might be worth 1.25 million now, given where asset values are at the moment. Now, what can that allow you to do? Can you restructure some of that debt or some of those assets to be able to get that equity out? Can you restructure some of your debt and extend the terms on it?

So, grab everything that's basically due in the next two years and maybe refinance it for three to four years to reduce your monthly payments. It's going to give you a bit of a buffer. I think that's got to be critical in terms of looking at your balance sheet as well. What are the strengths of it, and being able to go, “What can I do with that?”.

Ask, “Can I reduce my payments if I think I'm going to be going into some tough territories?” or “Can I pull some cash out by selling equipment now and building that cash buffer?”.

People don't normally think about those types of things. But I've come from a business finance background where we did a lot of restructuring with debt, so I'm really biased towards it. And I don't know that enough businesses understand that they've got equity now, particularly if they've got a number of hard assets or equipment assets in their business where they could potentially look at ways to leverage off that. Everyone thinks of property as being the asset that they can leverage, but certainly, at this point in time, equipment is in that space as well.

3. Negotiate and consider your pricing structure.

It’s unfortunate, but I think as a business, you've got to start looking at your pricing structure as well as negotiating your current rates. That's going to be a key component of managing the current environment.

We're in that space where if you went back to your customers and said, "Hey, look, I've got to increase my rates because labour costs have gone up." It's going to be more accepting. As everyone knows, input prices have gone up. If you're paying more in your business right now, whether for new equipment, higher interest rates, or increased labour costs, if you’re keeping your price point the same as it was two years ago, it is costing you money.
But at the same time, I think if you're looking to make that decision now, what you've got is certainly this projection that rates could continue to increase. And if there are additional supply chain issues, you're going to potentially see continued increases in the costs of equipment over the next 12 to 24 months. Be sure to factor that into your new pricing structure.

4. Understand how increasing interest rates will affect your industry.

Understanding what the Reserve Bank is doing and how it may affect your end customers is critical at this time. So, if it's taking money out of their wallets and spending capacity, if you're downstream from that, I think it's critical that you start thinking about some of the things you need to do as a business to prepare for a possible downturn.

5. Consider upgrading old machinery

When making the decision to buy a machine or an asset, there are going to be a few key things to look at. How much does it cost to keep the old machine? What are the maintenance costs? So, if you calculate how much that costs plus your existing repayment, you can compare it to getting a new machine for the next two to three years (the maintenance cycle on that will be very low).

Even though the rates are high compared to where they were 12 months ago, they're going to go higher again; that's what everyone's projecting. As a result, if you can get access to stock, you can justify it from a maintenance standpoint, and if you have a contract to generate cash to pay for that machine, locking in that rate and locking in a facility now is a wise choice. Especially when considering what rates might be in the next 12 to 24 months.

Any last words for business owners?

I think for me, I just want to wish businesses good luck! This is a convergence of so many different events that we've never seen before. In my 30 years in banking and finance, we've never seen such supply chain issues, inflationary pressures, or the coming out of a pandemic and what that's done globally. I think for a lot of people if you are not putting an extra 10 to 20% into thinking about your business strategically and all of these different aspects, yeah, you're probably not doing the right thing by your business. It's really important to get strategic.

And if you don't know how to do that, you've got to find someone to help you. Either you pay someone or find a friend within your network. You need to sit down and build some type of strategic framework to help you navigate this. Because, getting back to number one, you've got to be more agile. But to be more agile, you've actually got to be ahead of the curve in terms of thinking: what else could potentially go wrong, and where do I need to be?

Gear Select provides the vendor finance arrangements and facilitates finance for Hyundai Corporation on the forklifts. Contact our team at Hyundai High Performance Forklifts to discuss the best financing options for your business.

*This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances.