CNC Financing

[Eb0la11]

Anyone have alternatives to financing their purchase of CNC other than the one Camaster points you to? I do not plan on purchasing through a business but as an individual so no tax id. I have about 40% down payment and top flight credit but not sure if this will hinder me somehow without it being owned by a true business?

[Jim Becker]

There are lots of ways to finance this kind of thing for an individual. If you're an AMEX member and have outstanding credit, you can likely get an unsecured personal loan at just under 7%. Some of the credit unions have similar unsecured loans available. While using home equity isn't normally a good thing for general purchasing as a "best practice", if you have a HELOC, that's cheap money that is available to you as long as you are willing to pay it back in a short, reasonable time. Mine is at or just over 4% right now with the recent escalation of short term Federal rates that affected the "prime" rate. My HELOC is prime minus a half-percent.

[The real JP]

I just went to my bank I use. It was basically a car loan. I used the cnc as collateral and needed 20% down.

[John B]

Keep in mind, unlike before 2018 and the last tax bill, the money you draw from a HELOC is no longer tax deductible as "mortgage expense" unless you can trace it to improvements on the house itself.

[Jim Becker]

That's true, John...along with a whole bunch of other things. It forced me into a more expensive corporate setup for the new business because of the write-off aspects, too. Changes in tax law are sometimes hard to keep up with for sure and they do enter into any financial decision accordingly!

[de5]

Home Equity loans are usually very low interest.

[John B]

Originally Posted by Eb0la11

Anyone have alternatives to financing their purchase of CNC other than the one Camaster points you to? I do not plan on purchasing through a business but as an individual so no tax id. I have about 40% down payment and top flight credit but not sure if this will hinder me somehow without it being owned by a true business?

Back to your original question. If your personal credit is great, then you shouldn't have a problem with borrowing the money "not through a business"...for the most part, the first thing the bank wants when lending to a "new" business (particularly a small business), is a personal guaranty of the loan...and your personal financial statement, particularly if the business is "thinly capitalized".

They can still obtain a security interest in that piece of equipment (and anything else in your arsenal that isn't already securing a loan) and look to that as well as your personal guaranty.

You might be pleasantly surprised to discover that your bank will likely be "all about this", and you will find reasonable rates for borrowing. If you're running your new business as a "Schedule C" operation on your personal tax return, as I assume you will be (given "no tax id"), then this interest is deductible on that Schedule (not as an itemized deduction)...whereas the HELOC interest expense would not be.

As a CPA, I'm compelled to disclaim that I'm offering you tax advice here...

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

[rcrawford]

The best financing option totally depends on whether or not you plan on using your CNC to generate profit or just use it as a hobby machine.

For a hobby machine, you will probably get the best interest (and easiest loan) with a home equity line of credit. The bank doesn't care how you use this money, and you will not have a scheduled payment plan with it (this can be good or bad, depending how disciplined you are with payments!!).

But if you are wanting to make money on the machine, and and need to deduct expenses, it might be better to get a loan using the CNC as collateral instead of a HELOC.

BUT, even with a HELOC, I believe you can still deduct the interest if you set up a separate 'business' account and use that account to pay the interest on the HELOC? Or does this only work if you have a separate business? I know I often use my HELOC for large business purchases, and deduct the interest when my corporation pays it back to the HELOC. This is just a simple way to borrow money, at very minimal cost (if my corporation has a line of credit, I'm charged $100/month just to have it, even if I'm not using it - if I have a personal HELOC, I'm charged nothing except interest on money I've borrowed).

[Jim Becker]

Russell, the HELOC is an excellent way to do short term funding as you describe. What's changed is some of the provisions of the tax law relative to the deductibility of the interest effective for 2018. I don't know the details, but a good accountant should be able to explain them.

[John B]

I note that Russell is located in Alberta Canada, and is thereby not subject to U.S. tax laws vis-a-vis his HELOC. This is definitely a case of "your mileage may vary".

While it is true, in the U.S., that you can loan "your" money to "your" corporation and the corporation can deduct the interest, you have to have the money to loan in the first place.

If you have to borrow the money (say...from your HELOC) in order to loan it to your corporation, then (effective 1/1/18), you've just whipsawed yourself into the following situtation:

The corporation deducts the interest that it pays to you (the individual). You (the individual) have interest income on your tax return in the amount of that interest. If you (the individual) borrowed that same money from your HELOC, then you don't get to deduct the interest that you PAID on the money you borrowed. Not a good thing.

Here's another angle:

If you have a brokerage account, you can take a margin loan against a percentage of the value of your equities. This will be at an even lower rate than your HELOC loan. As long as you can "trace" the use of the funds, you can deduct that interest as "investment interest expense" to the extent of your investment income (which you will have from the interest that the corporation pays you). The "investment" is the money you re-loaned to your corporation. Win-Win.

Your corporation can pay you a higher interest rate than you're paying, thus removing earnings from the corporation and putting them on your personal return to your possible advantage.

There are minimums as to what you can charge your corporation based on the AFR (applicable federal rate) which is too complex to explain here. If your margin loan is bumping up against the maximum percentage, then your broker may sell some of your securities in the even the market drops. You might not like this. Your alternative is to pay the margin "call" from other funds (which you may not have). See your accountant.

Please see disclaimer on my post above (which I have not replicated in this post).