Having the right vehicles and equipment is vital to the success and longevity of any business, helping to maximise efficiency and productivity while maintaining a competitive edge.
However, funding the up-front purchase of expensive cars, trucks and other equipment is not always feasible. That’s why specialised finance for such assets is so popular. It enables businesses to put their new acquisitions to work immediately without draining their cash reserves or incurring the high interest rates of other credit options.
Below, we explore three of the most popular forms of business financing for capital assets.
Commercial Finance Agreements
Commercial Finance Agreements, also known as chattel mortgages, 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 financed 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 provide businesses with use cars and other vehicles, and 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.
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.
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.