Types of asset finance
Asset finance is hugely popular and used to fund a wide variety of business and personal assets and equipment. It allows a business to get the equipment they need now, and pay for it over its useful working life.
Whilst commonly used by individuals for vehicles, businesses can use asset finance to fund a broad range of equipment including machinery, yellow goods, manufacturing equipment and fit-outs, often inclusive of second hand equipment.
There are a number of different asset finance products with varying benefits. As a starting point, business people need to determine what their financial objectives are, as different loan types serve different purposes. There’s a lot of confusion and cross-over amongst the many terms used to describe asset finance, and the below should help clear things up.
A key consideration is who owns the goods and what the tax implications are. Refer to the below as a starting point, and your accountant or tax advisor can help determine what’s best for your business.
One thing that remains true across all asset finance types is that there is a level of flexibility around the loan term, so that you can choose a term and balloon to best suit your cashflow and business needs. Terms vary from 3 to 10+ years, depending on the asset type and things such as its useful working life, depreciation and resale market quality.
Please contact us should we be able to help with any of your asset finance need.
Equipment loan (AKA Chattel mortgage)
The borrower (your business) owns the goods, and repays the lender over the loan term. The lender takes a charge (security) over the goods and registers the charge on the Personal Property Security Register (PPSR).
The business maintains ownership of the goods from purchase date
Interest and depreciation are generally tax deductible
No deposit generally required, flexible loan term, balloon payments
Finance lease
The lender buys and retains ownership of the goods and leases them back to the borrower for the contract period.
The business doesn’t own the asset so it doesn’t sit on their balance sheet.
The business is generally responsible for ongoing costs
The business may have the opportunity to buy the goods at end of term (making it similar to hire purchase below)
Lease payments are tax deductible (opposed to just the interest under an equipment loan)
The business doesn’t need to make large or long term capital investments
The business generally bears risk of disposal
Hire purchase
The business leases the goods from the lender, with agreement that ownership is transferred to the business on receipt of the final payment.
The business is generally responsible for ongoing costs
Lease amount can be claimed as a tax deduction
The business still owns the goods at the end of the term
Operating lease
Similar to a finance lease, a business pays to ‘operate’ the goods for a portion of its useful working life under what is essentially a long term rental agreement.
A construction company may wish to use a crane for 2 years of its 10 year useful working life, entering into an operating lease for the 2 years
The lender is generally responsible for ongoing costs
The business only pay for the goods for the period they wish to use it
Lease payments are tax deductible (opposed to just the interest under an equipment loan)
The business doesn’t need to make large or long term capital investments
The business does not bear the burden of disposal at end of lease
Novated lease
Similar to a finance lease in that the borrower doesn’t own the goods, though generally organised through the borrowers employer. The lease is in the name of the individual who also bears the risk, though repayments are made by the employer as a salary sacrifice pre-tax
The lender is generally responsible for all ongoing costs such as fuel and servicing
Reduces personal taxable income and thereby tax payable
Generally ‘full service’ vehicles with all on-road and ongoing costs included
