Understanding Your Asset Finance Options

With the new financial year fast approaching, many businesses are turning their mind to their plans for next year and recovery from COVID-19.

If this involves acquiring equipment, then it is important to understand the Asset Finance options available and avoid expensive mistakes.

Why use Asset Finance?

The major benefit of Asset Finance is that it allows businesses to access equipment they need, without having to pay for it upfront.

This preserves cashflow and allows the equipment to be paid for over an agreed period of time.

Properly structured, Asset Finance provides many benefits of ownership, prior to actually owning the equipment.

Other Key Benefits of Asset Finance

Other benefits of Asset Finance include:

The cost of the finance is fixed over the term of the loan
Repayments are known which make planning easier
It can include a balloon (residual) payment which reduces monthly repayments
Repayments can be structured to cashflow which is important if your business has seasonal peaks and troughs, or if it will take time for the benefits of acquiring the asset to be realised
The finance is secured by the asset being purchased – that is; no other business or personal assets are generally needed to secure the finance
It allows you to build relationships and a track record with financiers external to your primary lender, providing a fallback position in case of need

The Equipment Finance Handbook Free Download

Deciding if Asset Finance is Right Your Business

Like all business decisions it is important to understand both the advantages and disadvantages of Asset Finance before committing yourself one way or another.

The Advantages of Asset Finance

Having current equipment can help improve productivity, lower costs and allow you to compete more effectively
If you operate in an industry where technology regularly updates it can help avoid being left behind
It avoids using business capital, or personal resources to acquire the equipment – thus freeing up this capital for other more important purposes
If the asset is used for business purposes, the lease payments or interest and depreciation, may be tax deductible depending on the financing product chosen
A range of financing options are available (refer below) which provide flexibility
Repayments can be aligned to cashflow

Key Considerations of Asset Finance

Asset Finance is highly specialised – Asset ownership, tax and depreciation elements that need to be considered. As mistakes can be expensive to unwind, it is important to use an Asset Finance Specialist and not a generalist financier!
Headline Interest Rates can be misleading. A low interest rate can mask a higher overall cost of finance over the term of the facility. An Equipment Finance Specialist can help understand the true cost of the finance and ensure you are comparing “apples with apples”
Repayments not structured to your cashflow, or that do not allow sufficient time for installation and commissioning, can cause serious cashflow issues down the track
The choice of financing products can be confusing and be difficult to understand.

Asset Finance Options

When it comes to Asset Finance there are a number of options from which you can choose. The most common include:

Chattel Mortgage
Hire Purchase
Operating Lease
Novated Lease

Chattel Mortgage

Key elements of a Chattel Mortgage include:

You own the asset and subject to satisfying qualifying criteria, can claim interest and depreciation on the asset
Terms range from 12 months to 60 months
Can include a Balloon (Residual) payment
The finance is secured by a charge over the asset being financed
When the loan is repaid (including any Balloon payment) the financiers charge is removed from the asset

Asset Finance Can Be Used To Purchase A Prime Mover

Hire Purchase

Key elements of Hire Purchase include:

The asset is owned by the Lender and is “hired” by you
Subject to satisfying qualifying criteria you may be able to claim the rental payments as a tax deduction
Terms range from 12 months to 60 months
Can include a Balloon (Residual)payment

Novated Lease

A Novated Lease is the 3-way Agreement between an employer, his/her employee and a Lender.

Key elements of a Novated Lease include:

The vehicle is owned by the Lender and leased to an employee for a fixed monthly fee
Terms range from 12 to 60 months
At the end of the Lease, the employee has the option of either handing the vehicle back to the Lender or purchasing it for a predetermined price
It can be attractive to employees as the Lease payments are paid from pre-tax income (To work the employer needs to offer Salary Sacrificing)
A Novated Lease is often used by businesses to retain key employees and/or to remove the Residual Risk associated with maintaining a fleet of company owned vehicles.

Operating Lease

Key elements of a Rental Agreement include:

The Asset is owned by the Lender
The product is generally used for assets that quickly depreciate or where regular technology updates are needed (examples being phone systems, computers, software, medical equipment etc. It is also used by businesses that operate vehicle fleets or airlines)
Terms generally range from 12 months to 60 months
The is no Balloon (Residual) payment at the end of the Lease
Subject to meeting qualifying criteria, the rentals may be tax deductible
At the end of the Agreement, depending on the arrangement reached at the outset, you may have the choice to simply hand the asset(s) back to the Lender, or purchase it for a pre-determined price

Summary

The Federal Governments Instant Asset Write Off Scheme has made it more attractive for businesses to invest in the equipment they need to transition through the recovery phase of COVID-19.

However, as I have outlined, if the equipment needs to be financed, then it is important to understand all the options available, to ensure the right product is chosen to maximise the return on your investment.

If you would like to learn more give me a call!

0433 210 353

Sharon Piening

Sharon Piening

Highly experienced Equipment and Motor Vehicle Finance Specialist. I love working with my clients and helping them navigate the complex world of equipment and motor vehicle finance.

Sharon Piening is a credit representative (474698) of BLSSA Pty Ltd ACN 117 651 760 (Australian Credit Licence 391237)