Are you struggling to secure the capital needed to acquire essential equipment for your small business? Are you finding it difficult to secure normal bank loan facilities to be able to acquire the plant and equipment that you need for your business? If you are experiencing these problems then you need to be aware of the other types of Asset Financing that will allow you to access the assets that you need to enhance your operations and drive growth.
What is Asset Financing?
Asset financing refers to various loan structures that allow businesses to purchase equipment, such as machinery or vehicles, to improve their operations. These financing options are designed to suit different business needs and circumstances.
Types of Asset Financing Options
- Chattel Mortgage (Equipment Loan) A chattel mortgage allows you to borrow funds specifically to purchase an asset. In this arrangement, your business owns the asset, but the lender holds it as security until the loan is repaid. This provides the necessary capital while offering automatic security for the loan. With this type of finance, you are able to access any upfront asset write downs for tax purposes or depreciation concessions.
- Commercial Hire Purchase Under a commercial hire purchase agreement, the lender retains ownership of the equipment, and your business pays hire fees to use it. These fees act as loan repayments, and at the end of the term, your business takes ownership of the asset, spreading its cost over time. For tax purposes, this finance is similar to a Chattel Mortgage.
- Operating Lease An operating lease also involves the lender owning the equipment, with your business paying hire fees to use it. Unlike other options, an operating lease does not offer the option to purchase the asset. The leasing costs are considered operational expenses rather than liabilities on your balance sheet. With this type of finance, you will not own the equipment so will not be able to access upfront write down or depreciation concessions. You will effectively be leasing the equipment.
- Finance Lease A finance lease involves the lender owning the equipment while your business pays hire fees to use it. At the end of the lease term, you have the option to purchase the asset. This arrangement spreads out the cost and provides flexibility. This finance is generally treated like an operating lease, subject to certain limitations depending on how the lease is structured.
- Novated Lease A novated lease is a unique arrangement involving your business, an employee, and a lender. Your business borrows money for a motor vehicle, which the employee then leases from the business. The repayments come from the employee’s gross salary, offering tax benefits for the employee. For the employer, there is no upfront tax concessions, and the lease payments are deducted from the employee’s salary so there is no net cashflow or tax effect on the employer.
Why Consider Asset Financing?
Asset financing can provide several benefits for small businesses, including:
- Access to Capital: Secure the funds needed to acquire essential equipment without depleting your cash reserves.
- Improved Cash Flow: Spread the cost of expensive assets over time, making it easier to manage your cash flow.
- Flexibility: Choose from various financing options to find the one that best suits your business needs.
- Tax Benefits: Some asset financing options offer tax advantages, such as deductions for interest payments, upfront write down concessions and depreciation.
The provision of asset financing is not a cookie cutter exercise. Every business has different needs and financial attributes, so the type of finance that suits one business may be very different to the type that suits another. While tax considerations are important, we always think that you need to think commercially first and tax second, when it comes to any decision within your business.
With that in mind, if you are unsure what type of finance might suit you, don’t hesitate to contact your client manager at KSW to discuss your specific circumstances.
AUTHOR – Michael Goodrick
Correct as of 29 January 2025
*Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.