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Asset Finance

Asset Finance

Asset finance is a wide ranging area that essentially as the name eludes to, covers the financing of anything that is deemed to be an asset. Most of the time, these are tangible assets, such as cars, equipment, inventory, however it can also sometimes cover intangible assets, such as goodwill.

There are a number of lenders that offer various types of asset finance, the key to finding the appropriate type of finance is having a good understanding of the different aspects of area of the market, which structure is most suitable to you and or your business needs and what to be aware of.

We arrange finance for the following assets:-

  • Motor vehicles and yellow goods
  • Equipment
  • Fit Outs

As mentioned above, besides the purchase of real estate, all other types of assets that banks can effectively take security over fall into this category. Typically these cover finance for the purchase of cars, equipment, machines and inventory or stock. Assets can also be intangible such as the goodwill of a business, these transactions can potentially also be financed, however that is more specialised area with a more restrictive offering.

There are a number of different ways in which asset finance transactions can be structured and deciding on the appropriate one for your particular situation is key. Typically your accountant of tax advisor would be the best person to advise you on which structure would be best for you. Typical asset finance structures are as follows:

Commercial Hire Purchase

With this type of finance, you hire and use the asset until the last payment. When you make the final instalment, title of the asset transfers to you. You can tailor payment options, including the loan period, a deposit and a larger final balloon payment. To help manage your cash flow, structured payments can be established according to your cash flow.

Chattel Mortgage

Chattel Mortgages are a popular finance solution where you own the asset from the outset and your loan agreement is secured by the asset. You can tailor your loan payments by choosing the term — typically up to five years. Other payment options can include a deposit and a larger final instalment. You can also structure payments to free up cash flow at the times of year you need it most.

Finance Lease

With a Finance Lease, the financier owns the asset however you bear the risk of disposal (of the asset) at the end of lease. This type of lease can benefit businesses that need the latest vehicles or equipment without tying up a large amount of capital. You can choose lease payments in advance or arrears and terms up to five years. A residual value is required in line with the asset’s use and the Australian Taxation Office’s guidelines.

Novated Lease

If you want to include a vehicle in your salary package, a Novated Lease can help. The financier owns the asset, while you and your employer sign a novation agreement to share the responsibilities of the loan. Typically loan terms are from 12 months to 5 years. Monthly lease payments and a final residual payment are based on your circumstances and guidelines set by the Australian Taxation Office.

Operating Leases

Operating Leases can often be used to fund a number of different assets. Payments towards this type of finance can sometimes be considered operating costs and will not appear as a liability on your balance sheet.

There is a very strong argument for the concept that as most assets depreciate fairly rapidly, especially motor vehicles, as many of us would be aware of, that it makes more sense to finance them than to use your equity or savings to purchase them. If the return that you can generate on your savings is greater than the cost of the finance and you can afford the monthly cash flow requirements, then financing should make sense. This argument is even more compelling when the asset is a business asset and the finance costs can be deducted as an expense in your income statement before tax. Understanding and planning for the ongoing monthly repayment commitment and in some instances being comfortable that you don’t actually own the asset are key, however in certain situations it can make sense to finance as opposed to purchase outright.

A common tactic employed, especially in the motor vehicle industry, is the promotion of cheap finance to lure in buyers. In many instances, the offers are real, 0% finance for the first 12 months or 2% finance for 4 years. These deals are real however in our experience there is often a double play at work. More often than not the finance department that provides the offer is related or owned by the seller of the asset. The way in which they can justify the lower finance offer is to charge more that they would normally on the sale of the motor vehicle, so what the one department loses on the finance, the other department makes up on the increased sale price. The way in which we advise clients to approach this situation is to engage with the dealership on the basis of a cash purchase and once you believe you have the lowest possible price, enquire about the finance terms. Outside of the motor vehicle industry there are some financiers that will allow you to purchase assets, typically up to a certain amount, with credit cards to allow you to accumulate frequent flyer benefits and after a month turn the transaction into a regular lease product. There are some of those offers available for certain transactions, however shopping around is key.

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