Residual payment basics: what you need to know before taking out your next loan

Looking to buy new equipment for your business without blowing your bottom line?

Upfront payments for large assets can risk your cash flow and your business’ future. A loan can safeguard your financial resources – freeing up cash and enabling you to invest in the growth of your venture.

Loan types, terms and conditions are varied – with many arrangements able to be tailored to meet your needs.

If you are looking to buy an asset with the minimal impost during the term of the loan, an equipment loan with a residual payment may be the answer.

What are residual (balloon) payments?

A residual or balloon payment is a final lump sum you are required to pay at the end of your loan term to own an asset outright. Usually, the lump sum is equivalent to – or less than – the depreciated value of the asset. Opting for a residual payment at the end of the term means your weekly payments are smaller and you

can plan for the final payment.

When it comes time to make the last monthly payment, you may have several options, depending on the type of asset finance you’ve taken out, including:

• Trade-in the asset you’ve had under lease and use the agreed value to pay out the lump sum payment
• Take out a new loan against the outstanding amount and continue payments of the asset until you own it
• Pay out the lump sum to secure full ownership of the asset.

When a loan with a balloon payment is for you

Consider this type of loan if you:

• See value in freeing up as much cash as possible to help your business grow
• Are looking for a lending track record that proves positive regular payments and the ability to make lump-sum payments (effectively showing savings)
• Prefer a loan product that does not require any deposit for the asset to be purchased.

What types of assets can you use residual loans for?

Most loans with balloon or residual payments are usually associated with motor vehicles however, this type of financial contract may also be suitable for a range of other equipment needs such as:

• Catering or commercial cooking white goods
• Office, IT and large-scale printing assets
• Manufacturing machines
• Earthmoving or heavy commercial vehicles
• Medical or treatment equipment

Five things you should you consider when deciding how much residual you want

There’s no getting away from the fact that the benefits of lower repayments result in a lump sum payment at the end of the loan term.

What should you consider?

1. Is the value of the asset at the end of the term likely to be the same or more than the balloon payment?
2. How long is the effective life expectancy of the asset?
3. Is the asset at risk of being superseded by incoming technology?
4. Can you refinance the residual and if so what terms will be available to you?
5. Which options are most tax effective for you and your business?

Did you know that all lease agreements are subject to GST? Under this arrangement, the Australian Taxation Office treats each loan payment as a separate purchase.

This also means you are also able to claim GST credits for any GST included in the lease charges. In finalising the loan, the balloon payment is treated as a separate transaction from the loan agreement – meaning you may have to pay GST. Check with your accountant for financial adviser to confirm what you are able to claim before finalising any finance agreements.

Bigstone Finance can offer fast, flexible loans from $10,000 to $2,000,000 for assets and equipment for your business.