Choosing the right asset finance facility to suit a business entity involves matching loan features with tax and balance sheet objectives and accounting method. There is not a one-loan-fits-all approach when it comes to financing business assets. Businesses have a choice of several credit facilities to fund acquisitions of motor vehicles, trucks, plant, machinery and equipment. The features of the lending product need to align with the objectives and structure of the business to be workable and effective.
Funding for business assets is available with Leasing, Chattel Mortgage, Rent-to-Own, and Commercial Hire Purchase. All are secured format loans available with fixed interest rates and fixed repayment terms. Beyond those similarities, there are differences with each of these lending products.
To ensure your business optimises the benefits from acquiring assets with finance, close attention needs to be paid to selecting the right type of loan. As brokers, our role is to find your best financing offer based your needs. We advise that business owners consult with their accountant for assistance in loan type selection. They should know your business structure well, the accounting method, balance sheet and tax strategy and will be the person to provide expert advice.
Accounting Methods and Asset Finance
Not all business owners may be aware of the method of accounting for their operation. They may leave all that to their accountant. It’s important to know what method of accounting is used to prepare the annual accounts as it directly impacts the most suitable lending product.
Businesses may use cash accounting or the accruals method. Cash accounting posts income and expenditure into the books when the funds are received or paid. The accruals method posts figures when invoices are raised and bills received. Cash accounting is widely used by many Australian businesses.
Chattel Mortgage is compatible with the cash method. Rent-to-Own and Lease are compatible with the accruals method. Commercial Hire Purchase (CHP) can work with either method.
Asset Finance, Asset Ownership and Balance Sheet
You may regularly see references to the ‘balance sheet approach’ with asset financing facilities. The connection relates to who owns the asset being financed over the loan term – the business or the lender. If the business has ownership title to the assets, the value must be posted to the company balance sheet as an asset/liability. If the lender retains ownership, the business does not need to post the value to the books.
Why is this important? Some operators, especially those operating on a smaller scale, may see having a large asset such as a heavy vehicle or large machine unit on their books as an issue. The loan may throw the balance of assets:liabilities in favour of liabilities. This can create a negative view of the financial position, which may affect their prospects of obtaining affordable finance.
When financing with Chattel Mortgage and CHP the business takes ownership from time of settlement. With Lease and Rent-to-Own, the lender retains the ownership while the business has full use of the asset — no posting to balance sheet and referred to as 'improving the appearance of the balance sheet'. This can be seen as a benefit for some operations.
Asset Finance Tax Deductions
Tax deductions are essential for business, and all asset credit facilities provide benefits, but with varying processes. Lease and Rent-to-Own allow operators to deduct the full amount of the monthly payments made in the year.
With Chattel Mortgage and CHP the process is different. Only the interest applicable to monthly payments is a direct deduction. The balance of each payment is not. As the asset is posted to the balance sheet with these loans, the asset is subject to depreciation. The annual depreciation amount is the annual tax deduction. The amount will reduce each year as the asset value falls but the full purchase price will be expended over time. The ATO sets depreciation schedules.
Terms, Rates, and Payouts
The repayment term will be similar, regardless of the credit facility. Lenders assess the value of the goods, loan amount, credit history and financials to approve the term. We negotiate with our lenders to achieve the most workable outcome with up to 84mths/7yrs available for most businesses.
All asset financing loans include an end-of-term payment to finalise the loan, but with differences. Leases include a residual which is set according to the ATO schedule (also known as a balloon payment). CHP and Chattel Mortgages give operators the option of a balloon, which is negotiable with lenders, not subject to ATO rulings. At the end of a Rent-to-Own loan term, businesses may negotiate a buyback with the lender to take on the asset ownership outright.
Rates are where most business owners will note a difference with loan types. Across the lending market, CHP and Chattel Mortgage offer the same rate and the lowest in the loans available. Lease rates are higher and Rent-to-Own the highest asset finance rates.
Rates will vary with lenders and using our specialist broker services can assist operators to cover a vast lender selection to secure their best possible rate.
Expert Services for the Right Asset Finance
For many operators, this issue may sound very complex and outside their comfort zone. But securing affordable, workable financing does not need to be complex. Draw on the expertise of your accountant for selection and advice and on our expertise to source and structure the right financing package for your business.
For the right asset finance at the most competitive rates and terms, connect with Business.Finance brokers on 1300 000 033.
DISCLAIMER: THE SPECIFIC PURPOSE IN PROVIDING THIS ARTICLE IS FOR GENERAL INFORMATION ONLY. IT IS NOT INTENDED AS THE SOLE SOURCE OF FINANCIAL INFORMATION ON WHICH TO MAKE BUSINESS FINANCE DECISIONS. BUSINESS OWNERS WHO REQUIRE ADVICE OR GUIDANCE AROUND THEIR SPECIFIC FINANCIAL CIRCUMSTANCES ARE RECOMMENDED TO CONSULT WITH AN ADVISOR OR ACCOUNTANT. NO LIABILITY IS ACCEPTED IN REGARD TO ANY MISREPRESENTATIONS OR ANY ERRORS RE ANY DATA, SPECIFICS, POLICIES AND OTHER INFORMATION AS SOURCED FROM OTHERS
