Getting what you need to get ahead: asset finance explained
In business, growth is often the goal. But for many businesses, expansion means needing new equipment, vehicles, machinery or technology - and that all costs money. Asset finance can help reduce the initial outlay, while your business gets what it needs to scale. Here are some key things to consider before you apply and what to look out for.
What's the common denominator between a networked hard drive storage, a fleet of delivery vans, a barcode printer, and a suite of new office desks? Depending on your business, they could be the assets you need to keep up, pivot and grow.
In 2019, asset finance arrangements were up 64% over the previous year. And with a lease-to-buy option now available for almost anything a business needs - asset finance could be the difference between growth and running in place.
How can asset finance help?
While it's most often used as a way for businesses to scale without having the capital on hand to do so, asset finance can be a short-term solution in a range of situations. Lenders can often approve asset finance in 1-3 days, allowing a business to respond quickly to market changes or seasonal pressures.
And there are other benefits, too. Fixed repayments can be factored easily into cash flow. Your business can avoid depreciation costs. You can free up much needed capital for other expenses. It can also be used as an alternative to debt financing or a new line of credit.
Is it just a small business loan?
No, there are clear distinctions between the two. A small business loan normally requires security (your home, another business or cash reserves, for example), and often comes with a higher interest rate. They're typically used to get the capital needed to start, expand, or buy a business.
Asset finance, on the other hand, is used to finance the acquisition of equipment, often through hire purchase and lease agreements.
A hire purchase agreement is a lease agreement where ownership of the equipment transfers from the lender to the customer when the loan is paid off. Essentially, your business buys assets on credit, and the lender owns them until you pay the final instalment.
There are two main types of lease - finance and operating. A finance lease is similar to hire purchase, but your business doesn't need to agree to purchase the equipment until the end of the loan period. Your lender owns the equipment, and at the end of a fixed term, your business can choose to pay the balance and purchase outright, or lease something else.
"Asset finance is a good way to maximise cash flow and help your business grow - but only if you can service your loan agreement."
An operating lease means there's no option to buy an asset outright. This can be a good way to access any equipment you need for short term jobs or projects. Simply lease it for as long as you need, and then return it to the owner-lender once the lease expires.
Often called an "equipment loan", taking out a chattel mortgage means you're borrowing money to purchase a vehicle or business equipment outright. Chattel mortgages often follow a similar structure to a fixed rate home loan - your business gets the asset up front, but the lender keeps ownership as security until the loan is paid.
Due to the financial impact of COVID-19, the government has introduced various measures to help Australian businesses keep trading. One of these is expanding the instant asset tax write-off to $150,000.
If you purchase any eligible business assets - like vehicles, tools or office equipment - up to that amount, you can claim immediate deductions until June 30, 2020. And those deductions could mean your business saves money compared to making an asset finance agreement that includes interest.
Of course, despite the increase in the tax write-off limits, it always pays to consider buying assets based on what your business really needs - rather than overspending now due to an opportunity to save on tax.
What do I need to watch out for?
It should go without saying that careful consideration is needed before entering into large business purchases or finance arrangements. The structure and size of your business will influence the options available to you, but there are a few key things to keep an eye out for.
Consider the best way for your business to keep up with repayments. If your cash flow changes seasonally, flexible repayments might suit. If your balance sheets look similar year-round, stricter repayments may be a better option.
Make sure you're clear about ongoing fees and upfront costs involved with any asset finance options - including the costs to get the equipment on-site or return it at the end of the loan - as they could turn a low-interest loan into an expensive decision. And think about the type of asset you are leasing? Is it a short term fix to a problem that will keep returning and needs a permanent solution?
At the end of the day, asset finance is a good way to maximise cash flow and help your business grow - but only if you can service your loan agreement. If you want to know more about the asset finance options available to your business, speak to a qualified mortgage broker today.
(C) Advantedge Financial Services Holdings Pty Ltd ABN 57 095 300 502. This article provides general information only and may not reflect the publisher's opinion. None of the authors, the publisher or their employees are liable for any inaccuracies, errors or omissions in the publication or any change to information in the publication. This publication or any part of it may be reproduced only with the publisher's prior permission. It was prepared without taking into account your objectives, financial situation or needs. Please consult your financial adviser, broker or accountant before acting on information in this publication.