Asset finance is a broad term that covers a range of financial products designed to help businesses obtain the equipment they need for day-to-day operations and growth.
Most lenders can finance almost any asset, from cars to plant and even audio visual equipment. However, there are limitations on the type and condition of the asset depending on the loan structure. The type of asset will also affect the interest rates, fees and security requirements.
Why use asset finance?
Asset finance involves paying a regular amount for use of an asset over time, as opposed to purchasing an asset outright. It helps businesses avoid a large capex cost and assists in maintaining a steady cash flow for the life of the asset.
Some lenders offer asset upgrade options at the end of a loan period, allowing the business to maintain up-to-date equipment without huge cash flow fluctuations. There are also tax benefits associated with certain loan structures, though these should be discussed with a qualified accountant prior to committing to a loan contract.
What can be financed?
Assets are classified as either “hard” or “soft”. A hard asset will usually have an identifying serial/chassis number and can be financed both new or used (eg. cars, commercial vehicles, plant equipment). Soft assets generally have limited resale value and include items such as IT hardware and software, medical equipment, CCTV and office fit out.
At Track Financial, we work with Australia’s best lenders to offer multiple asset finance options depending on your business goals and financial position. There are three main asset finance loan structures, each of which is explained in more detail below.
Asset Finance product options
A hire purchase is an agreement in which the lender acquires an asset on behalf of the customer and leases it back to them over a set term at a fixed monthly rate. It is the most common type of asset finance for commercial vehicle purchases, however it can be used for almost any type of business equipment.
Although the asset is officially owned by the lender, business expenses such as depreciation, running costs and interest paid can be claimed for tax purposes. There is an option to have a residual balance at the end of the lease term, which can be used to reduce the overall monthly payment amount. Once the residual is paid, the ownership of the asset transfers from the lender to the customer.
A chattel is essentially any item of property excluding real estate. As such, a chattel mortgage refers to a type of loan whereby the lessee purchases the asset and the lender registers a mortgage on it. Essentially, if the lessee defaults on the loan, the lender can claim against the mortgage.
As the lessee officially owns the asset, they are able to claim depreciation and interest expenses, as well as input tax credit from GST incurred. Chattel mortgages offer the option for a residual balance or to pay down the loan entirely by the end of the term.
Novated leasing enables a business to offer a leased vehicle to employees at no cost to the business. The employee may also be eligible for certain tax benefits through salary packaging, however this should be discussed with a qualified accountant. Novated leasing is a convenient way for employees to finance a car and can be used to attract high quality employees to the company.
The structure of a novated lease is that the employer leases a vehicle in the employee’s name, then deducts the expense from the pre-tax salary of the employee through salary sacrifice. At the end of the lease term the employee has the option to purchase the vehicle at the residual amount, refinance the lease or take out a new lease.