How to select asset finance for your business
Arranging car finance or purchasing other business equipment can seem complicated. However, there is a range of flexible asset finance options to suit your business and provide you with more opportunity to use your working capital to help grow your business. Options include an equipment loan, hire purchase or finance lease agreement.
Many businesses don’t have enough available cash to consider an outright purchase, making asset finance a necessity. Even if you can afford it, you want to put your money to good use and investing cash in assets leaves you with less working capital to finance operations or explore new growth opportunities. The flexibility of asset finance allows you to align repayments to suit your cash flow and you may be able to claim tax deductions.
For example, if you run a delivery business, it’s not necessary for you to pay upfront for all the vans you use. You might use a range of finance options, from an equipment loan, hire purchase or a finance lease. Using these products gives your business the opportunity to use the vans in exchange for regular payments, rather than paying the full lump sum upfront.
Exploring your asset finance options
The first step is to explore the options available.
Taking out an equipment loan, can be an effective way to finance business equipment purchases, especially if it’s important to you to own the asset from the outset. Businesses can usually get a loan for the full cost of the goods (no upfront deposit) with the asset itself serving as security for the loan. Generally, the interest you pay plus the depreciation of the asset is tax deductible to the extent the asset is used in your business.
The advantage of an equipment loan is that it doesn’t tie up all your available cash and generally doesn’t require additional security, enabling you to use your available cash and credit lines to generate income. Ownership passes to you immediately and your bank registers a goods mortgage over the asset.
An equipment loan can be tailored to suit your business’ cash flow, with a range of repayment options. You can also choose to reduce the loan amount and the related finance costs by adding some equity through a deposit or trade-in.
If you want to own the latest equipment and vehicles but preserve your available cash, then a Hire Purchase (HP) agreement might suit you. With a HP agreement, your bank buys the equipment you need and hires it to your business for an agreed period.
Like an equipment loan, a HP agreement doesn’t tie up available cash and generally doesn’t require additional security. Similar to the treatment under the equipment loan, depreciation of the asset and the interest potion of any lease repayment may be tax deductible.
Leasing also allows you to get the latest equipment and vehicles with no capital outlay. Your bank owns the asset and leases it to you for an agreed period. The rentals are structured with a residual value – giving you options at the end of the lease period. You can make an offer to purchase and if your financier accepts the offer, take ownership of the asset. Alternatively you can enter into a new lease for the residual. The lease payments may be claimed as a tax deduction, to the extent the asset is used in the business.
The advantage of having a residual value is that your monthly payments will be lower, placing less strain on your cash flow. However, if you want to eventually own the asset, you can make an offer to purchase (plus GST).
If you’re looking for vehicle finance as part of a salary package for employees, a Novated Lease can be structured to help staff maximise their salary package while reducing costs for your business. A Novated Lease is essentially a three-way arrangement between the financier, your business and the employee. The financier owns the asset and leases it to the employee. Your business pays the lease on the vehicle out of the employee’s pre-tax income, and the vehicle remains the responsibility of the employee if they leave your business. This also allows employees to choose the vehicle they want and shop around to find the best deal, reducing business administration costs associated with buying, maintaining and selling company cars. As an added benefit individuals may avoid some GST. The bank pays and may be entitled to claim the upfront GST, and the employer generally pays and may be entitled to claim the GST on payments. Fringe benefits tax implications for a Novated Lease should be discussed with your accountant.
Office and technology equipment can date very quickly. Leasing this sort of equipment can help you keep costs down while enabling your business to stay up-to-date. You also get a choice of rental payment options and either return the equipment at lease end or offer to purchase it. Rentals are usually tax deductible to the extent the equipment is used in your business.
Sale and Lease/Hire Back
Even if you already own equipment, you can free up your cash with a Sale and Lease/Hire Back solution that lets you sell your equipment to a bank and they lease/hire it back to you.
Cash flow considerations
Knowing how your business will be impacted when you finance equipment is important. You should prepare a cash flow forecast together with your accountant to see how the new financing will affect your bottom line.
If your business is affected by seasonal cash flow variations you’ll need to structure your Finance Lease, Hire Purchase and Equipment Loan repayments to suit your business’ anticipated cash flow.
Knowing how and when your equipment will generate income will help you determine the best way of paying for it. You should also assess the expected productive life of an asset. This way you won’t have to finish paying for an asset beyond its useful life or pay for a piece of equipment too quickly, putting stress on your cash flow.
Chatting to your accountant and NAB Small Business Banker will help ensure you get the right asset finance package tailored to your budget and business needs.
- Learn more about NAB’s asset finance solutions or talk to a NAB Small Business Banker on 13 10 12.
- Identify possible improvements to your cash flow using the NAB cash flow tool improvement calculator.
- Meet with your accountant and advisers to review the best asset finance options for your business.
Please note that this is a guide only and should neither replace competent advice, nor be taken, or relied upon as financial or professional advice. Seek professional advice before making any decision that could affect your business.
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