New business financing questions

Claasman

Hi, first time poster, long time lurker. I am just looking into an idea at the moment and was wondering if i could ask some questions.
So, i have seen a market for renting a piece of equipment to some companies. The cost of this is 130k, this would earn me approx 65 to 70 k in total over 2 years. I would then sell it for 100k(current market value for equipment that age). The costs to me would be zero as maintainence would be covered by the companies and any breakdowns would be covered by the manufacturer(parts and labour).transport costs would be very small. I would be able to keep my daily job as i would have no real input in the system.
my main question would be about financing this, my knowledge in this area is pretty limited as i havent studied much business wise since the lc. How much would an loan of 130k cost me? Is there a way to pay a reduced rate for the 2 years until i can sell the asset to repay the loan in full or is their a product the bank sell for this kind of loan? Do ye think getting into this much debt is worth the income minus the cost of the loan and taxes ? also feel free to poke holes in the business plan. The long term goal would be to grow the business by increasing numbers of equipment.

antoinolachtnai

Who would your customers be? Are they very small? Do they only use the equipment very occasionally? Are they deadbeats?

I only ask because based on the numbers, it would seem more sensible for these companies to lease/hire-purchase the equipment themselves, rather than renting off you, if they have any sort of financial capacity.

maxwell smart

For a loan like that, you will need a nice bit of capital yourself. As you will more than likely set up a new company to run this through, you won't have accounts so will need to put up security yourself.
Also, the banks will need a comprehensive business plan from you

Bandara

If I was a company that required such big machinery etc why would i rent off you and not some big organisation like h2k where I most likely already have an account?

Also on the funding I'd be surprised if the bank gave you more than 35% - 40%

Claasman

antoinolachtnai wrote: »

Who would your customers be? Are they very small? Do they only use the equipment very occasionally? Are they deadbeats?

I only ask because based on the numbers, it would seem more sensible for these companies to lease/hire-purchase the equipment themselves, rather than renting off you, if they have any sort of financial capacity.

the companies would only have use for this during a peak period, the thing is the income would be from more than one company, depending on when they needed this. If it was only one company hiring this from me, i agree it would make more sense for them to lease/lease to buy it themselves.

Claasman

maxwell smart wrote: »

For a loan like that, you will need a nice bit of capital yourself.

i was just about to ask how much, but hammertime answered it below. Thanks ht

soddy1979

Hi Claasman,

The below analysis are just ball park figures but here goes anyway. I based it on a 10 year loan at 5.25% per annum variable interest rate which equals 5.4% APR.

I will look at the lower end of the scale, saying your idea will generate 65K over the two years or 32.5K per year.

Your loan payments will be 1394.79 per month on the above loan which is negative cash flow of 16737.48 per year. As you have 32.5K incoming, your total annual cash flow will be positive 15762.52 for year one.

Now, at the end of 24 months you will have an item that is worth 100,000. However, you will still owe the bank 109,361 euros. The excess 9,361 euro will be taken from year two cash flow leaving a net positive cash flow of 6401 euro.

There is one very serious risk that I see with this idea. That is, that you cannot sell your machine for 100K at the end of year two. If for instance the market value of the machine falls 22%, your entire cash flow is gone for year one and year 2. If it falls more than that you could be in real trouble.

The other serious risk I see is that you do not achieve your rental target. A 50% error in year one and a 20% error in year two will also eat up all of your cash flow.

I suggest you do some analysis of micro and macro economic variables effecting the possible future value of your machine before undertaking your investment.

On paper (ie. the income statement, balance sheet & cash flow statement) the project will look a lot different.

If you would like me to do a more detailed analysis for you I will. It won't take too long. I can show you what sort of things will effect the value of your machine and what the economic outlook is for them. I can also show you the accounting side of things. PM me if you wish.

Edit: This also assumes you get 100% funding. I can do the same on any percentage funding you wish.

Claasman

Hey, thanks for the numbers soddy1979. To save up 60 or 70 percent will take me a couple of years anyway so it will be a while until i would be able to get it up and running. Do you know if it would be possible to delay the repayments or pay a lower rate until i sold the asset after the 2nd year?would an interest only loan be good in this situation? thanks.

antoinolachtnai

As has been said, you need to analyse the assumptions very carefully.

If you have more than one company using it, then you will end up having to cover the maintenance and training too, I'd say, and you'll need to consider that in your business planning. (It may be that 'soft' stuff like maintenance, on-site support and training is what differentiates the winners from the losers). Also, if the business is linked to the seasons, is it possible that everybody will want the equipment at the same time?

soddy1979

Hi Claasman,

Main thing to note on an interest only loan is that you obviously make no capital repayment over the interest only period.

For example, lets say you take 130K interest only for two years at 5.25%. You will be paying 585 per month / 7020 per year on the loan and getting 32500 back in revenue.

After year two, you will still owe 130,000 but your asset will only be worth 100,000.

It still gives you a margin of about 20K for revenues and asset depreciation, so not too significant a difference from a regular interest & capital repayment loan.