Original article from: Small Business Victoria
Imagine for a moment that you want to buy yourself a car. What things would you consider when making an investment of that size?
What make and model do you want? Do you want to buy new or would a cheaper used car suit your needs? Do you want an SUV, a small hatchback or an electric/ hybrid vehicle? What about warranty and after-sale service – how are you protected once you’ve made your purchase? Is the seller reputable? Do they have good customer feedback? Has the car ever been involved in an accident? Is it still under finance? Is it stolen?
As you can see, there are a lot of questions to ask yourself when you make a major personal purchase.
The same goes for making a major purchase for your business. If anything, it’s even more crucial as your business will rely on that equipment to turn a profit and may do so for years.
Doing your homework before you buy may save you money, time and heartache later.
Here are our best tips to help you avoid the post-purchase blues.
Do your research
If you’re making a major purchase, you need to do some research to make sure you’re buying the right thing but don’t rely on referrals from the supplier or online reviews. Instead, seek out independent views and be wary of product ratings online that may be influenced by the supplier.
Talk with other businesses in your industry who have purchased the same equipment. Quiz them on how long they have owned the equipment, any known issues and their level of satisfaction with its performance. If you are a member of an industry association, they may be able to offer advice or group purchasing.
Check out the supplier’s reputation
Making sure you buy from someone reliable and with a good reputation can be as important as the equipment itself. You may rely on them for delivery, servicing, spare parts and training.
Check out if the supplier is a current member of the relevant industry association and check the association’s website for any industry dispute resolution policies.
Search the Personal Property Securities Register to ensure the equipment is free of financed debt. Otherwise, you risk a debt collector seeking repossession of the equipment. When searching the PPSR register make sure to search the serial number of the equipment you are purchasing, and also to search the owner of the equipment – you can search by ACN and/or ABN number. A bank can hold a financial interest over all goods in a business and it is important to have goods released from these types of charges before payment.
Assess your needs
We all like to buy shiny new things, but your business is here to turn a profit. Every dollar you spend on equipment comes at the expense of your bottom line or investment in other areas of your business. It’s important to move past what you might want and look at what you need.
Consider if you need to purchase new equipment or if second-hand or refurbished condition would do.
- How reliable does the equipment need to be? Will it bring your business to a standstill if the equipment breaks down? If so, you may be best to buy new with a solid warranty.
- Will second-hand or refurbished equipment perform to the same standard as new equipment? The savings you make could outweigh any doubts about reliability or performance.
Weigh up whether you would be best to lease, hire or purchase the equipment.
- Leasing or hiring is a good option if you want to regularly update the equipment to the latest model. Read the agreement carefully to understand your rights about returning the equipment early in case it doesn’t suit your needs, and for servicing and repairs.
- Buying equipment outright may cost you less in the long term and enable you to make alterations to fit your needs. However, you may need to seek finance at additional cost to afford the purchase.
If buying equipment, you will need to consider if you will choose to finance the purchase or pay for equipment from cash flow. When using finance, you will need to consider your GST status and your accounting method (cash or accrual) as this will determine the correct finance product for your needs. Your accountant or trusted business advisor will be able to guide you with this information. Instant asset write-off claims are also available for equipment purchases and you should check your eligibility on the ATO website.
If you will be seeking finance to pay for your equipment refer to the ASBFEO Business Funding Guide for information on preparing your business for a finance application. Think about your finance application well before you need to make your equipment purchase. Businesses that plan for a finance application will have a much higher approval rate than those who apply for finance at the last minute.
Toni operates a bakery in regional Victoria. Toni’s bread slicing machine has broken down and is beyond repair. Toni’s last slicer cost $5,000 over ten years ago and she is unsure what she should reasonably pay for a slicer these days. Toni has reservations about investing in a new machine as fewer customers are asking for their bread to be sliced.
“I called a few bakeries in other country towns and asked them if they have recently sourced a new slicer for their business,” said Toni. “One told me he recently purchased a slicer for $4,000 and has regretted it ever since as it has been unreliable. Another told me she no longer offers to slice bread and hasn’t lost business. The third bakery I contacted told me they lease their slicer under an affordable arrangement and can return the slicer with a month’s notice.
“Weighing up this information I’ve decided to lease a slicer and I will see how it goes,” said Toni. “I might be brave one day and stop slicing!”
Consider your budget
How much you are prepared to pay and how much you can afford to pay are sometimes different numbers. Reflect on the qualities of the equipment that are most important for your business needs. These may include reliability, capacity, efficiency, environmental impacts and the quality of performance.
Your decision may come down to what you can afford right now but consider the lifespan of cheaper options. It might be worth paying more for equipment that will last longer so that it doesn’t end up costing you more in the long run with downtime, maintenance or replacing the cheaper option every time it wears out.
If using finance to purchase your equipment consider the life of the goods in relation to the finance term you propose to use. A longer finance term will lower your monthly payments – however, if the equipment has a shorter effective life (for example, IT equipment) then a three-year finance term would be more appropriate. Another example is to think about the kilometres a motor vehicle will travel. If the vehicle will do many kilometres every year – then a shorter finance term would be more appropriate as the vehicle is likely to be replaced in a shorter time frame.
Also, make sure to factor in additional costs that may not be covered in the initial price. These may include installation, delivery, servicing, parts and consumables.
All of this will inform your decision about how much you are prepared to pay.
Know your rights if things go wrong
Australian Consumer Law gives you the right to cancel purchases of $40,000 or under and seek a refund where equipment fails to be of acceptable quality and the failure is major. If the failure is minor, the supplier may choose to repair or replace the equipment.
It is still important to be aware of your consumer rights as suppliers can’t stipulate conditions on purchases that contravene Consumer Law. Just because a supplier states that they don’t accept refunds doesn’t mean they have a legal right to refuse if you’re entitled under Consumer Law.
For equipment purchases over $40,000 in value, you may need to seek legal advice about your rights under case law established in the courts.
Exceptions apply to goods purchased for resale and some other business uses. If you purchase something for yourself at a shop, you can’t ask for a refund if you found it cheaper somewhere else or decide you don’t want it. You also can’t ask for a refund or replacement if you break or misuse a product. The same rules apply for purchases you make for your business so make sure you know when you are not protected by guarantees.
If the supplier is uncooperative, you could seek the assistance of the Victorian Small Business Commission, Consumer Affairs Victoria or take legal action in the Victorian Civil and Administrative Tribunal (VCAT) or a court.
Stephanie runs a hairdressing and beauty salon business. She took out a loan of over $20,000 to purchase some equipment for her business. Unfortunately, Stephanie experienced significant issues with the equipment that proved to be faulty from the day the equipment was installed. This required Stephanie to arrange more than a dozen repairs in the year after purchase. She also found that the seller’s staff was not very professional in showing Stephanie and her team how to operate the equipment.
“Maybe if I spoke to some other businesses like mine who purchased this equipment, I would have found out some useful information,” said Stephanie.
Sadly, the seller went into liquidation and Stephanie was left with a business loan to service for equipment she couldn’t use.
Be careful sourcing equipment from overseas
While you may be able to purchase the equipment from overseas at lower cost, be aware that you might have difficulty enforcing your rights under Australian Consumer Law. Overseas sellers might not have an Australian network of repairers and parts supplies.
Even if there is a local agent for the product, you may find that they do not offer service or repair under warranty for products bought overseas. Having to send equipment back to the country of origin can be expensive and cost your business valuable time.
If you are using finance to pay for goods purchased from overseas your finance application and products will be more complex. You will need to make your financier aware of your intention to purchase from an overseas supplier at the start of your finance application, and you will need to allow more time for arrangements to be made. There may also be additional charges and fees for your finance and for freight and customs charges. You will need to consider the implications of movement in foreign currency exchange rates when considering purchasing from overseas suppliers, particularly if there is a long lead time between ordering your goods and making the final payment.
Always read the contract
In fact, read it at least twice.
For more expensive equipment purchases, you might be subject to a contract that stipulates things like:
Service period – You might need to check the duration of your service period and whether it begins from purchase or delivery date.
Maintenance – It’s important to check what is covered under any maintenance agreement as there may be elements that could cost you additional money. For example, is maintenance provided 24/7 and do weekend or after-hours call-outs cost extra?
Replacement parts – If replacement parts are required, are you guaranteed new parts, or could the supplier use refurbished parts at their discretion?
Additional coverage – check if you’re being sold any coverage items such as extended warranties that you are not aware of. On the flip side, you may want additional coverage not included in the original contract that you can negotiate before signing on the dotted line.
Termination of contract – often service contracts will have a termination fee if you want to exit early. Also, check for any clauses that may allow the supplier to terminate the service agreement early so you understand under what conditions that might happen.
If there are any unfair contract terms, you could ask the supplier to remove or amend the term or discuss your rights under Australian Consumer Law with a lawyer.
Doing a little research and making smart decisions about equipment purchase before you buy can help you avoid having problems later.