What are your commercial financing options?
With long-term life equipment, like solar, rental is the most common finance solution. The reason for this is the taxation department ruling that solar must be depreciated over 20 years. With solar rental, we finance the ex-GST portion of your customer’s purchase price and 100% of their payments are tax deductible. While we must charge GST on rental payments, this is claimed back by your customer in their quarterly BAS statement making rental the lowest finance cost option over five years. With rental, the asset is owned by the finance company and does not appear on the balance sheet giving your client more financial leverage to continue to purchase other assets to operate their business.
The other main option, which may be appropriate for your client, is a Chattel Mortgage. In this option, your client purchases the goods, including the full upfront GST payment, and brings the solar asset onto their asset register providing the finance company a mortgage over the goods. The amount financed is the whole amount including GST so the finance base is higher and the consequent payments slightly higher. The main advantage to this style of finance is the big ‘GST hit’ in the quarter your client purchases the asset. Your client claims 100% of the GST paid on the purchase price in their next BAS statement receiving a GST refund which typically will cover four or five monthly installments – or often used to pay down the loan. The main downside to this facility is you can only claim depreciation and interest as a tax deduction.
While similar in operation to rental this option is generally selected only when a residual is required. This can be handy for your clients if payments need to be lower and they are happy to either pay a residual or roll the residual into a second lease period.
Option Solar $36,364 ex GST ex-STC / $40,000 inc GST ex-STC’s
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Here is a comparison of the main forms of funds used to finance used to finance solar projects. In this example, we use a $40,000 (including GST) example. As you can see the after-tax cash position is better using a rental option assuming the company is a tax paying individual or company. Other options may be more effective for non-profits, incorporated bodies and Government agencies. Just call our finance experts who will be able to craft a solution specifically for your clients’ needs.
Solar Finance is much more than an interest rate
The first question we are typically asked is “What is your interest rate?”
While the interest rate is an important part of a finance package, when crafting solutions for solar and renewable energy projects selecting the right financial product to support the financial needs of the business installing solar is just as important.
Here is an example of how an ASM Money finance consultant crafted a solar finance solution specifically to meet the needs of a customer.
This Riverland business had been trading well and was producing significant profits resulting in a potentially very large tax liability for the current year. All indications are they will have another good year in 2014/15. They were tempted to just pay cash to install solar.
The ASM Money consultant pointed out, with the slow rate of depreciation allowed by the tax office, a short-term rental was probably a better idea and would generate significant tax benefits. They recommended he rent the system for two years and pay annually in advance. By doing this the $85,000 solar array, after taking all tax benefits into account would only require a cash outlay of $57,811 over ten years while paying cash up front would cost $65,681 over the same period.
More importantly, as rural production can be very uncertain, this preserved cash for the 2015/16 year when the El-Nino weather pattern looks likely to put pressure on the business.