If 2020 has taught us one thing, it is that carrying debt in a small business can leave you exposed and at your bank’s mercy when there is a major economic downturn.
In the wake of the Banking Royal Commission, traditional financing methods have become difficult for small trade business owners to explore. Lengthy application processes, strict credit history review guidelines and tough approval criteria are now the new norm.
Traditional methods, like finance and leasing your trade business fleet are becoming less and less attractive for tradies.
Why?
Since the royal commission, banks have tightened the lending criteria significantly for borrowers, particularly businesses. Car dealerships are recording finance application rates sky-rocketing north of 30 per cent.
Loans are being strictly tested for suitability. When it comes to your business the banks are assessing your suitability based on “serviceability”, which in essence means profitability. So, if you are a new business starter or your trying to scale your business up and your margins are tight, getting loans or leases is going to be a tough task.
So, why are tradies switching to renting their utes?
No debt obligations
Hiring your ute means you can get wheels on the ground without a stressful debt carried over your business which, ultimately if you are the director the debt is in your name. When you consider debt, you must think about a few things, most notably, the interest rate.
The cost of borrowing money in 2020 is far better than it was when our parents borrowed money years ago. However, that is if you qualify for a low interest loan, which is fast becoming rarity. More and more people are having to opt for high-interest finance agreements which is not ideal particularly for start-up businesses.
Depreciation
Depreciation is quickly discussed, easily forgotten factor when it comes to asset purchases. The reality is that depreciation costs are real. How it is recorded when it comes to your books, can be left to a discussion with your accountant. What Tradies really need to consider is what will your ute be worth when you go to sell it.
A ute such as a Toyota Hilux will depreciate at roughly 16 per cent to 20 per cent of its value every year. A commercial vehicle that may suffer from more wear and tear than usual being close to jobsites means that the vehicle could depreciate at a quicker rate than usual.
When it comes to hiring a ute, you carry none of the burden of depreciation on the vehicle because you do not own it. At the end of the rental period you hand the ute back and roll over to a new contract.
Length flexibility
Financing or leasing a ute leaves no flexibility for payments over the life of the loan. You are subject to the payments terms of the agreement and can face harsh penalties if you miss a payment. On a five-year agreement that is 60 monthly payments that you cannot miss.
You carry around your credit history for life and your trade business is no different. Even something as little as a finance application rejection leaves a mark on your credit history which can hinder your future credit score.
Hiring a ute allows you to discuss payment terms with the rental company as well as take a short-term contract which gives you the freedom to renew or return the vehicle over short periods like three to 12 months.
If you are growing your business and bringing on an employee, that employee will likely work through a probation period. A shorter contract is a great alternative to a three to five-year lease or finance agreement on a ute that can just be returned if that employee decides to leave.
Tim Cullen, Co-Founder and Director, TradieSpec
