Someone told me years ago, there’s good debt and bad debt and without going into the semantics of it all and dissecting what this finance guru believes and what that finance guru believes, what he meant by good and bad debt was there is debt you can claim and there is debt that you cannot claim.
Today I’m focussing on Asset Finance, which is what we do at Ressource Lease, Loan & Commercial – we finance “Working Assets” which are assets such as vehicles or business equipment used to generate an income. Working assets typically decline in value over time unlike real estate assets that appreciate in value.
Quite often people think asset finance and immediately think car finance. Most business owners require at least one car and this is usually financed however cars make up less than half business assets financed. The other business assets or working assets includes everything from Earthmoving equipment, Trucks and Trailers, Agricultural equipment, Materials handling, Food manufacturing equipment, Civil Construction Equipment, Medical equipment, the list goes on. Any piece of equipment that is used to generate an income is considered a working asset.
Which Finance Product?
Selecting the right equipment for your business is important. You not only want to select the right supplier you also want to make sure that the asset is going to perform and deliver a result and is fit for purpose. So too with asset finance, you want to select the right supplier or broker that will work with you and take the time to understand your business and make sure that you have the right finance product to suit your objectives.
There are three common finance products or “loan types” that most working assets will be funded by. All three finance products have features that may either suit or nor suit your business and the key is to know what your objective is, what your tax position is and how you will dispose of the asset once you have finished with it.
Let’s Get started
Finance Lease
With a Finance Lease or a Lease, the lessor (Or the lender) purchases the asset that you need and then leases it back to you for a fixed contractual term. The ownership is retained by the lender. Just like any other finance product, the lender requires the customer to pass any approval criteria and demonstrate their ability to fulfill the contractual agreements and service the lease.
Some points to note:
- No Deposit. 100% finance available – a deposit is not permitted with this product.
- A residual is compulsory. Residual values are set in line with ATO guidelines which can be found at ATO ID 2002/1004 | Legal database
- Terms are 12-60 months
- GST is payable on the instalments and the residual.
- At the end of the lease period, the customer can return the asset which may be sold at auction or offered to sale to the customer by the lender
- Customer (Lessee) is responsible for any shortfall between the residual and the sale value.
Hire Purchase
With a Hire Purchase the lender purchases the asset on the customers behalf and then the customer purchases it from the lender on an instalment plan. Once the final instalment has been made then lender then transfers the ownership to the customer. Again, as with any finance product the customer needs to obtain finance approval and be able to demonstrate their ability to meet all contractual agreements.
Some points to note:
- 100% finance available to approved purchasers. Customers can make a deposit, or it may be an approval condition.
- Balloon payment available
- Terms from 12-60 months
- Once the final instalment has been made, Ownership is transferred to the customers.
- Flexible payment terms. Payment terms can be matched to income flows. Monthly, Quarterly, Annually, bi-annually or seasonal.
Chattel Mortgage
With a Chattel Mortgage, the customer effectively owns the asset from the outset of the agreement. The lender then holds an “interest” or security over the goods until the final payments has been made. The lender loans the customer the funds they require to purchase the asset and requires the customer to demonstrate their ability to meet their contractual agreements and obtain normal finance approval.
Some points to note:
- 100% finance available. Customer can elect to pay a deposit upfront or it may be an approval condition from the lender.
- Balloon payments available. Optional up to 5 year terms
- Ownership is retained by the customer there may be able to claim an Input Tax Credit.
- Customer may be able to claim depreciation.
- Once the final payment is made the lender releases the security over the asset.
Your asset finance broker can help facilitate any of the above finance products, the important thing is to seek your own financial advice from your accountant or tax adviser as to what product best suits your business and the working asset you’re purchasing.
Ressource Lease, Loan & Commercial are fully accredited with one of Australia’s largest finance aggregators and have access to some excellent finance products from multiple bank and non-bank lenders may of which specialise in commercial asset finance.
Click on the link below to get a faster pre-Approval to get the ball rolling, our aim is to help you find the lowest cost option available.
There is no-doubt that many business owners already are aware of each finance product and how it sits in the market place, but for those that are relatively new to asset finance or have recently started on your journey of self-employment then I hope this has offered a little insight for you.
Thanks for taking the time to read – All the Best
Adam
