What is Asset Finance: The Definitive Guide
Our most comprehensive guide on asset finance
What is Asset Finance?
There are many types of asset finance offered by banks. Choosing the right option has both cashflow and tax implication. Asset finance is a type of finance used by businesses to obtain the equipment they need to grow. It usually involves paying a regular charge for use of the asset over an agreed period of time, thus avoiding the full cost of buying outright. Make sure you engage the right advisor to give you advice on which option is best for you Contact us >.
Asset finance can be used to fund any asset – ranging from telephones and photocopiers to forklift trucks and aircraft. It could be the perfect solution if your business needs new equipment that might otherwise be unaffordable.
Why use Asset Finance and what are the benefits ?
The various forms of asset finance provide a number of advantages for the customer:
They give businesses access to the equipment they need without incurring the cash flow disadvantage of an outright purchase
Finance agreements can often be tailored to the business’ needs, with flexibility on both the term and repayment schedule
Leasing and HP are excellent budgeting tools as payments are usually fixed, allowing improved cash flow management
Asset finance providers often specialise in a particular type of asset about which they have expert knowledge
What is a Chattel Mortgage ?
Chattel mortgage is a legal term used to describe a loan arrangement in which an item of movable personal property is used as security for the loan. The movable property, or chattel, guarantees the loan in this type of mortgage. This differs from a conventional mortgage in which the loan is secured by a real property.
Businesses frequently use chattel mortgages to purchase new equipment that can serve as security for the lender. For example, heavy machinery has a long lifespan and its purchase can be financed over a period of time by the seller, who will want to keep a security interest in the machinery in case of default. A chattel mortgage can be put in place, allowing the buyer to use the equipment, while maintaining a safe position for the seller. In the event of default by the buyer, the seller can recover the equipment and sell it to recover losses from the loan balance.
Vehicles, airplanes and boats are also good examples of assets that are often financed using chattel mortgages.
Benefits of a Chattel Mortgage
A key feature of a chattel mortgage is that GST is only charged on the vehicle’s purchase price and not on the monthly repayments or on the final “balloon" payment. So if you account for business income and expenses on a cash basis and you are registered for GST, you can claim the GST from the vehicle’s purchase price immediately (on your next business activity statement).
100% finance available to approved customers
Arrange a balloon payment at the end of the loan to reduce your regular repayments.
When the car is used for business purposes, interest charges and depreciation up to the ATO depreciation limit are claimable as a tax deduction.
What is a Hire Purchase ?
The finance company purchases the asset on behalf of the customer. The finance company owns the asset until the final instalment is paid, at which point the customer is given the option to buy it for a nominal sum.
CHP was once a popular option for commercial car finance. However, legislative changes introduced on 1 July 2012 related to their GST treatment made commercial hire purchases significantly less attractive than other finance options in almost all circumstances.
Since that time, instances of businesses opting to finance cars via a CHP have drastically decreased, to the point that many lenders no longer offer CHP as an option.
Benefits of a Hire Purchase
An offer to hire can be arranged with no deposit
The vehicle being hired is normally enough security
Arrange a balloon payment at the end of the term to reduce your regular payments.
Businesses can employ this manner of leasing goods to enhance the appearance of earnings metrics.
What is a Finance Lease ?
The bank purchases the vehicle you need and lease it back to you. Under a finance lease, the value of the asset appears on the lessee’s balance sheet and the rental payments pass through the profit and loss account. The full value of the equipment is repaid to the lessor, plus interest, over the lease period. When the lease expires, you can either return or purchase the asset.
As your financier claims the GST on the vehicle’s purchase, you only need to finance the purchase price excluding GST. However, GST is charged on the monthly lease rental and on the residual value at the end of the lease.
If the car is for business purposes, and the amount financed is below the Depreciation Limit set by the Australian Tax Office ($57,466.00 for the 2014 - 2015 Financial Year), you can claim the lease rental as a tax deduction.
Above this limit, you can claim interest charges on the lease and depreciation up to the value of the depreciation limit.
Benefits of a Finance Lease
Immediate access to the asset without using up capital
The asset being leased is normally enough security
Match your lease to the period you need the asset for.
Monthly payments are fixed for the length of the lease so you can budget with confidence.
You can use a residual to improve the affordability of your lease. The Australian Tax Office sets minimum residuals for tax purposes, but the only maximum is what your financier will approve.
The ability to make advance payments allows you to bring forward tax deductions or match seasonal cash flows.
What is a Novated Lease ?
The financier owns the asset, while you and your employer sign a novation agreement to share the responsibilities of the loan. A novated lease is a three-way agreement between an employer, employee and a financier whereby an employer leases a car on behalf of the employee.
A car is leased in the employees name and running costs such as fuel, insurance and maintenance are all included in a single lease repayment, paid for using a combination of the employees pre and post-tax salary. This means the employee could reduce their taxable income and pay less tax.
There is usually no cost to employers, as the novated leasing management company takes care of all the administration. With changes to the way the lease is treated for tax purposes, this option is becoming more attractive to small and medium enterprises and offers a good alternative to company fleet cars. LEARN MORE ABOUT NOVATED LEASES>
Things to remember about a Novated Lease
Monthly lease payments and a final residual payment are based on your circumstances and guidelines set by the Australian Taxation Office.
If you are interested in a Novated Lease, talk to your HR department for options.
What is an Operating Lease ?
Operating Leases can often be used to fund many different assets. An operating lease may be more appropriate if the customer does not need the equipment for its entire working life. Payments (which appear in the customer’s profit and loss account) are made to the lessor for the use of the equipment while it is needed. The leasing company may retain responsibility for maintenance and is likely to take the equipment back at the end of the lease period. As the customer only keeps the asset for a very limited period, it is not shown on the lessee’s balance sheet:
Fleet Operating Lease
With this type of finance, the financier owns the vehicle and the client returns it at the end of the term, usually from 12 months to 5 years. When leasing a vehicle, the fixed monthly payments typically cover registration, insurance, tyres and scheduled servicing and maintenance. For a small business, a Fleet Operating Lease can help free up time and resources.
Technology Rentals / Lease
Technology can change quickly and often the large up-front costs of purchasing the latest equipment will make a big dent in your cash flow. Renting rather than owning technology can help reduce the risk of owning obsolete equipment while preserving cash to grow your business.
Similar to a Fleet Lease, the financier owns the equipment and the client returns it at the end of the term, usually within 3 years.
What is a Master Rental Agreement ?
For some businesses who take asset finance loans often (and hence repay old ones often), a master rental agreement with a pre-approved limit can be highly useful. You can draw down on funds at any time to acquire equipment – you don’t need to apply for additional funding and you repay the amount over the agreed term in monthly instalments. This form of finance works very well for companies with large fleets of cars, trucks, buses or airplanes. The constant turnover of these assets means that the usual individual asset finance contracts can be both time consuming and expensive.
What is an Asset Import Finance ?
Sometimes, assets that you buy from overseas needs to be paid for before the asset arrives to Australia. Traditional asset finance requires the asset to be immediately accessible by the financier. A more structured solution is needed for imported assets. Sometime a form of Trade Finance can be utilised to accommodate this.
Comparison between Lease, Chattel Mortgage and Hire Purchase
What assets can be financed ?
Although the list of assets that can be finance directly is extensive, there are a number of common categories:
Cars: by far the most common form of asset finance
Other vehicles: trucks, buses and other road vehicles
Agriculture machinery: tractors, farming equipment etc
Plant and equipment: machinery, pallet racking, refurbishments and office equipment
Technology: traditional hardware as well as softwares
Medical: CT Scanners, MRIs, ultrasound equipment, X-ray equipment, Nuclear medicine PET etc
Aircrafts: Airbus, Boeing, Bombardier and others
Energy efficient: renewable energy assets