Having the right vehicles and equipment is vital to the success of any business.
Running a business can be an extremely rewarding, but at times challenging, experience. With no one-size-fits-all approach, each business owner is on their unique journey, and their business’s operational requirements can be just as unique. However, there is one business fundamental that all owners share: the need for cashflow and liquidity.
Asset finance is a great way for businesses to procure the assets they need – be it vehicles, machinery or new technology – while reducing purchases to easier manage, regular repayments instead of upfront costs, keeping revenue within the business operation. In many instances, asset finance can also help businesses by offering flexibility in terms of asset ownership, while also reducing their tax liability and providing additional savings.
But what is asset finance? Read on as we look at the different types of asset finance, and how it can support businesses.
What is Asset Finance?
Asset finance is a way for businesses to acquire necessary equipment, vehicles and machinery without large, and often unfeasible, upfront costs.
Asset financing explained
As the name suggests, asset finance is a range of loans or leases that businesses can access, subject to approval for the financing of assets for a specific business purpose. Asset financing differs from cash flow loans as the loan or lease is tied directly to an asset, and often uses the asset itself as security: this is known as a secured loan.
Below, we’ll explore three of the most popular forms of business financing for capital assets.
Key Types of Asset Finance for Businesses
Like any loan or financial product, lenders have an eligibility criteria you must meet in order to access finance for a new car. To be approved for a loan with Metro Finance, you need to meet the following eligibility criteria:
Commercial Finance Agreements
Commercial Finance Agreements, are a fast, flexible way to take ownership of assets such as cars, trucks, trailers, and other construction and earthmoving equipment.
A lender provides the funds to purchase the vehicle or equipment, and the borrower takes ownership at the time of purchase. The lender uses the asset finance as security, so interest rates on commercial financial agreements are usually significantly lower than those of unsecured facilities such as cash flow-based loans.
A range of terms are available, so repayments can be structured to suit each business’s unique needs. They are typically paid over 2 to 5 years, and can be set at a regular monthly amount, or customised to fit your unique cash flow requirements. A larger one-off balloon payment can also be set at the end of the term to help lower the regular instalment.
With a Commercial Finance Agreement, the lender pays the goods and services tax (GST) as part of the purchase cost, whereas the business which owns it is entitled to claim an input tax credit up front. The business can also claim interest and depreciation costs, depending on the extent to which the asset is used for business purposes.
Finance Leases
Finance Leases provide businesses with the use of cars and other vehicles, as well as equipment without taking ownership of them. In this form of business financing, a leasing company (referred to in legal terms as the lessor) buys the asset and gives the use of it to a business or person (the lessee) in return for regular payments.
Finance Leases typically run for 2 to 5 years and are widely used for vehicle finance. They are particularly suitable for businesses that use their vehicles primarily for business-related purposes and turn them over regularly, such as vehicle fleet companies.
Unlike a car loan, when a Finance Lease comes to an end, businesses may be presented with a range of options including renewing the lease, choosing to purchase it outright by making a final payment, or trading it in for a new model and continuing with a new lease agreement.
There are no annual or account-keeping fees associated with this finance option. Lease repayments for business vehicles are generally 100% tax deductible, GST on lease payments may be able to be claimed*, and it may be possible to make lease payments in advance for tax deduction purposes.
Novated Leases
Another alternative to a car loan is a Novated Lease, which instead of leasing vehicles to the business owner, enables employees to finance a new or used car by paying for it out of their pre-tax income. This is a tax-efficient form of salary packaging known as salary sacrificing.
This form of vehicle finance usually runs for 1 – 5 years, and is based on a three-way agreement whereby an employer agrees to make car lease payments to the finance company by deducting them from an employee’s salary. The vehicle may be used as part of a business arrangement, or it could be entirely for personal use.
For the employee, a Novated Lease can be a cost-effective way to secure the use of a car, not only because of the income tax savings but it can also include running costs such as fuel, servicing, registration, and car insurance in the repayments deducted from their pre-tax salary.
For the employer, it’s a low-risk way to help attract, retain and reward valued team members without the business having to take on new liabilities or manage a vehicle fleet. If the employee quits, the responsibility for making alternative arrangements with the finance company lies with the employee.
Comparing Asset Finance Options
As we’ve talked about, there are a range of asset finance options available to businesses, and it’s important to understand the differences between them to find a solution that is right for your needs. Commercial finance agreements, for example, allows you to take ownership of an asset right away, whereas a finance or novated lease keeps ownership of the asset with the lender.
Some important elements to factor in when considering asset finance are:
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Ownership, and whether you or the lender own the asset during and at the end of the finance period.
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Tax benefits, including instant tax write-offs and depreciation, and whether you are able to claim part of your loan/lease repayments or the interest charged on them, as a tax deduction.
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Flexibility around the terms and payments, including whether there are any penalties for paying off the loan early or making additional repayments throughout the term.
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Whether your business is in a suitable industry for further tax benefits, government support or any other financial support mechanisms for procuring assets.
How to Choose the Right Asset Finance Option
Aside from the immediate cost savings often attributed to sustainable assets, there are several other key advantages when it comes to financing green equipment, including:
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It sounds simple, but it’s very important that you take some time to consider your specific business needs, and what implications the acquisition of an asset will have on your business. Not just in terms of ability to complete work and new business tasks, but also the asset’s impact on things like cashflow and liabilities.
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Again, this is all about your unique business needs. Do you need to own the asset, or are you happy to lease it and potentially offset some of its running costs? Answering these questions will help determine the asset finance option that might best suit your needs and outcomes.
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When considering any financial decision, it’s important to discuss things with your accountant and/or financial adviser to understand all cashflow and tax implications. If you’re considering a novated lease on a vehicle, it’s also a good idea to chat with your employer about the salary packaging options on offer, and how that will affect your pre-tax income.
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Once you have a clear picture of your needs, one of Metro’s friendly brokers will be able to help you in obtaining finance for your required asset or assets, and support you throughout the process, step-by-step. Speak to an accredited Metro Finance broker today for guidance by clicking here.
To learn more about the asset finance options available to your business, speak to an accredited Metro Finance broker today.
*Before making any investment decision, consider consulting your accountant or seeking independent financial advice.
