Asset Finance: Which product is right for my business?
The term asset finance covers a range of lease structures designed for businesses to obtain the equipment they need to grow. Asset finance involves paying a regular amount for use of an asset over time, thereby avoiding the capital expenditure required to purchase an asset outright.
Lenders can cover a huge range of assets, from cars to plant and even audio visual equipment, however the type of asset will affect the loan structure, rates and security requirements.
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 etc.). On the other hand, soft assets generally have limited resale value and include items such as IT hardware and software, medical equipment, CCTV and office fit out.
At Lendfin, we offer three types of asset finance, these being chattel mortgage, hire purchase and novated leasing. Each loan structure is slightly different and suits different business purposes, as explained below.
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 probably the most common type of asset finance for commercial vehicle purchases, however it can also 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. Furthermore, the employee can avail of the associated tax benefits through salary packaging, however this should be discussed with a qualified accountant.
The structure of a novated lease is that the employer leases a vehicle in the employee’s name, then deducts the expense from their pre-tax salary 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.
Novated leasing is a convenient way for employees to finance a car and can be used to attract high quality employees to your company.
At Lendfin, we have experience helping our customers select the right type of asset finance for their business. Contact us to discuss how you could use asset finance to grow your business and increase tax benefits.