As a finance broker, how much deposit would I put into an equipment purchase?

Cash is king

If I was running an established equipment fleet and a bank was prepared to finance 100% of a purchase on acceptable terms, my general preference would be to keep my cash in the business. I’ve always had a fairly simple view on this: cash is king.

If I’ve got a piece of equipment out working, generating revenue and earning enough to service its own debt, I would generally rather use the bank’s money to fund that asset and keep my own cash available. That’s particularly true in heavy industry.

You can have a great business, a strong pipeline and plenty of equipment working and still run into periods where cash flow tightens through circumstances largely outside your control. Prolonged wet weather in Queensland can stop equipment working; winter weather in southern Australia can do the same. Customers pay late. A major repair arrives at the wrong time. Work is delayed and projects move. That is when cash sitting in the business matters.

If I’d put $100,000 into a $500,000 equipment purchase six months earlier when the bank was prepared to finance the entire invoice, I can’t simply ask for that $100,000 back because it’s raining and my fleet has stopped working. I’ve converted liquid cash into equity in an asset. Unless the business was absolutely flush with cash and genuinely had more than it could reasonably use, I wouldn’t rush to put deposits into revenue-producing equipment.

Do you actually need a deposit for equipment finance?

One of the more persistent misconceptions is that a deposit is automatically required. For established businesses, that often isn’t the case. Across MFG Finance, approximately 98% of the equipment finance volume we arrange involves financing 100% of the tax invoice, including GST. We’ve arranged 100% funding on individual equipment purchases running into the millions of dollars without the borrower contributing a deposit.

We meet owners, accountants, advisers, insurance professionals and equipment suppliers who assume a business buying a $500,000 asset needs to put in $50,000 or $100,000 before a bank will fund the balance. That is often a residential property finance mindset applied to a different kind of lending.

For an established operator meeting a lender’s credit requirements, a $500,000 equipment purchase can potentially mean a $500,000 facility. So my first question isn’t necessarily, “How much deposit does the bank require?” It is, “If the bank will finance 100%, is there a good reason for me to contribute one?” My starting position would generally be no.

Why I’d rather keep the cash

On a $500,000 purchase, contributing $100,000 and borrowing $400,000 reduces my debt and repayments. It also removes $100,000 of liquidity from the business. If everything goes perfectly, that is fine. I’m more interested in what happens when it doesn’t.

What happens after six weeks of rain? When a major debtor runs 60 days late? When another asset needs a significant repair, or work slows unexpectedly? I’d rather have access to the $100,000. If the equipment is earning revenue and comfortably servicing its debt, my preference is generally to let it do exactly that.

But what if I wanted, or needed, to contribute a deposit?

There are circumstances where contributing cash makes sense. The lender may require it. The business may already carry substantial debt. I may deliberately want lower repayments or less leverage. The asset could depreciate unusually quickly. Or I might have substantial surplus cash and want a more conservative debt position.

I wouldn’t simply pick an arbitrary percentage. I’d work backwards from what I’m buying, its realistic second-hand value and depreciation, my likely finance payout, how long I expect to own it, the liquidity I want to retain and my GST position. The aim is sensible equity and headroom in the asset without unnecessarily stripping cash out of the business.

Think about the exit before deciding on the entry

Don’t only ask what the repayments look like. If I needed to sell the equipment in three, six or twelve months, what might it realistically sell for? What would my finance payout be then? Would the sale comfortably clear the finance, or could I need to contribute more cash?

That helps me decide whether 10%, 20% or nothing at all makes sense. My preference for 100% funding where circumstances support it does not make it the right answer for every transaction. Getting it approved gives you options; you still have to choose the structure.

Don’t forget the GST

GST adds another dimension. Depending on the purchase, the business’s GST eligibility, BAS cycle and accounting circumstances, it may subsequently receive the benefit of an input tax credit. That possible cash movement belongs in the deposit conversation; it should never be treated as an automatic or immediate cash refund.

If I contributed around 10%, I’d also consider the GST credit that might subsequently flow through the business. If I put in substantially more upfront, I’d want to understand my actual net cash position after GST. The timing and treatment depend on the transaction and should be confirmed with the business’s accountant or tax adviser.

So what would I actually do?

For an established business buying revenue-producing equipment, my personal starting point is simple: if the lender will fund 100% on good terms, I’d generally keep my cash. I’d rather have liquidity for the things I can’t predict than lock it into equipment capable of generating revenue and servicing its own debt.

If a deposit was required, or I deliberately wanted to contribute one, I’d work backwards from asset value, depreciation, expected payout, GST and the cash I wanted left in the business. There is no magic deposit percentage. The objective is a purchase that works for the business without starving it of cash it may need elsewhere.

At MFG Finance, this is the sort of conversation we have before simply submitting an application and accepting whatever structure a lender sends back.