For small or new businesses needing capital to acquire new equipment or to expand operations, there are different asset finance options available.
What Is the Most Appropriate Asset Finance Option for Your Business?
Business owners sometimes experience difficulties in getting financing to purchase the latest equipment, expand operations, ramp up marketing, or invest in product development. This happens because small or new businesses usually have inadequate cash flow and are dependent on external finance options.
So, if you’re short on capital, you might want to look into your asset finance options.
Asset financing is designed to help you address cash flow concerns and gives you the ability to acquire the capital you need to keep your business running efficiently. With the right asset finance option, you can purchase equipment outright and grow your business as planned.
Basic asset finance options
When considering asset financing, it’s important to familiarise yourself with the basic asset finance options available to be able to choose the best one that can benefit your business.
1. Commercial hire purchases
A commercial hire purchase enables you to hire an asset (e.g. equipment) owned by the lender, and use it until it is paid off completely. This means that the hire fees you pay function as loan repayments. Once the asset is paid when you make your final instalment, your business can take ownership of the asset.
Commercial hire purchases are flexible as these usually allow for changes in the loan terms based on your financial status and cash flow.
2. Finance leases
For businesses that don’t want to tie up a lot of capital in acquiring the latest equipment, finance leases are offered by banks. In this type of asset finance option, the lender (bank) purchases the asset (equipment) and leases it to you and continues ownership of the asset when the lease term is over. However, your business bears the risk of asset disposal. If not, you have the option to purchase the asset at full value (with interest over an agreed timeline) after the lease expires.
Just make sure the buyout option at the end of the lease is stated in the contract. You can then deduct the leasing fees you paid during the lease period from your taxes, as long as the amount doesn’t exceed the depreciation limit set by the Australian Tax Office (ATO).
3. Chattel mortgages or equipment loans
With a chattel mortgage, you can borrow money to purchase an asset. This arrangement allows you to own the asset, which is held by the lender as security until you finish repayments. This asset finance option also gives you the flexibility to customise your loan terms, such as paying a bigger deposit or making a higher final payment.
4. Novated leases
A novated lease is a practical choice for businesses that offer a vehicle in their salary package or want to help their employees in their vehicle purchase. In this asset financing alternative, the employer and employee sign a novation agreement signifying their mutual responsibility for the loan.
The business borrows money from the lender for the purchase of a vehicle which, in turn, the employee leases from the company. Once the employee completes repayment of the loan (through lease payments), they can take ownership of the vehicle and claim tax deductions at zero cost to you. This means reduced payroll tax and worker compensation costs for your business.
- Operating leases
For small businesses that require a fleet, an operating lease is a great solution. In this case, the lender owns the fleet of vehicles during the loan term (12 months to 5 years). Once the loan period expires, all you need to do is return the vehicles to the lender. Fleet scheduled maintenance costs, as well as registration, insurance, and other related expenses can all be included in the lease to simplify loan payments.
Remember that your business requirements should always remain top of mind in any business loan decision.
To determine the right option and get the best loan terms for your business, work with us at Lend Perspective.
Get in touch with us today.