Why Would You Chose a Rental Finance Option?
In Australia there are a number of financiers that offer a Long Term Rental Contract (i.e. 12 months or more)
This product offers very good opportunity for the new business owner to get the equipment, vehicle etc. that he needs to make his business work.
It also presents a good opportunity for the business with no financials or poor financials or the business or business owner with a past credit problem.
The vast majority of businesses that don’t take up rent to buy are put off by the monthly payment over the initial 1st year. A payment that is more than double a conventional finance agreement is difficult to comprehend.
This is done without looking at the overall picture
Rent to Buy offers.
1. You qualify with a one day ABN, no asset backing required
2. If you have a clear credit file approval is virtually guaranteed up to $65,000.00
3. Even if you have poor previous credit, approval is significantly easier than for conventional finance
4. After 12 months you get three choices on what to do with your goods.
a. You can refinance on a conventional loan (see costs comparison below)
b. You can extend the rental at a reduced payment rate
c. You can hand the goods back with no strings attached.
The finance cost of the purchase when looked at over the most common finance period (5 years) paints a true picture of the total cost of purchase should any business chose to retain the goods in the long term.
Let’s look at the cost of financing equipment over five years, using both a Rent to buy example and a conventional loan example of $30,000
Rent to Buy Conventional Loan
Finance Amount $30,000.00 $ 30,000.00
Typical Monthly Payment $ 1,500.00 (1 year) $ 620.00 (5 year period)
Payout Amount after one year $19,200.00 $ 24,917.00
Rent converted to loan payment $ 469.00 (4 Years) $ 620.00 (remaining 4 years)
Total Rent & Payments (5 years) $ 41,712.00 $ 37,200.00
(for this example the loan interest rate is 8%)
The first 12 months of any business is its most difficult and stressful time. If your business cannot afford the Rent to Buy option, is your business genuinely viable. If it’s not a better alternative is probably not to go into business.
If your business can afford the payment, look at the versatility of rent to buy, given that over time there is little difference, only a 10% additional cost.