Fletcher Rowe | November 13 2018
Historically, businesses investing in productive equipment has long been an indicator of business confidence. Increased investment in this manner can provide an insight into the overall health of an economy.
Less understood are the varying different types of asset finance, and how different types of finance work best for different businesses and applicants.
Commercial asset finance (also known as equipment finance) refers to finance namely for the purpose of purchasing plant or equipment for business use – i.e. assets used for the production of goods or supply of services. Asset finance, in contrast to home or personal loans, establish predetermined repayment amounts, and depending on the nature of the asset, may carry varying loan terms and residual amounts, often referred to as a “balloon”.
Commercial asset finance can be used for the purchase of a variety of goods for business use.
While these loan terms and residual amounts will vary based on guidelines presented by the ATO relating to the expected depreciation on the particular asset, the details of a particular loan contract can usually be modified to meet the expected cash flows of the business, and to maximise any taxation advantages.
Understanding the minutiae of these products is where we come in, as we can provide a solution that ensures you are making the most of your new purchase.
Categories of Equipment Finance
Equipment finance can be split into two main categories: lease and non-lease finance.
This is an arrangement whereby a lender purchases goods on behalf of a business, with the business then renting the goods from the lender for an agreed amount and duration. The owner of the goods would be the finance provider.
Leases may even be fully maintained. In these scenarios, all running costs of the vehicle (petrol, registration, insurance and maintenance) are all covered in the rental amount.
At the end of a lease, the customer will return the goods to the lender.
One of the key aspects of a lease, and the reason they are so popular, is that the tax benefits of the purchase are transferred from one party to the other. The borrower is able to treat the entire rental payment as an expense. GST payments can also be claimed during the term of the finance and on residual value. From an accounting point of view, leases are usually more straightforward for the borrower, and this is often a deciding factor when considering a lease.
There are three main types of lease agreements for goods:
- Finance Lease;
- Operating Lease;
- Novated Lease.
In a non-lease finance transaction, the customer is the owner of the goods.
Unlike a lease, where the entire payment amount is treated as an expense, only the interest component of the repayment can be used to offset business income – like the interest paid on an investment home loan. The customer is also able to claim depreciation on the goods since they are the owner.
At the end of the period, the asset is retained by the customer.
Non-lease finance can be broken up into two categories:
- Commercial Hire Purchases;
- Chattel Mortgages.
Types of Goods and Assets
Ultimately, there are no limitations to the type of equipment that can be financed, provided the goods are to be used for predominately business use (51% or more).
Vehicles and equipment that are generally acceptable include, but are not only limited to:
- Passenger cars;
- Light commercial vehicles;
- Heavy vehicle trucks/trailers;
- “Yellow Goods”, including: Forklifts/excavators, construction and mining vehicles/equipment;
- Manufacturing plant/equipment;
- Marine craft;
- Electronic/IT Equipment (computers and software);
- Printing presses;
- Office fit-outs for professional use.
When determining the right type of finance for your business’ goods, it is imperative to seek the advice of a recognised industry professional. Call or email today to look at the best option for yours.
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