The basics of asset finance
Businesses that need high-cost equipment – vehicles, machinery, IT systems – usually don’t have the cash on hand to make the purchases. One option is to take out a commercial loan to get the funding needed to purchase the equipment outright.
In addition to the traditional bank loan options, more small business owners have been turning to alternative forms of finance when they need high-value equipment. These alternative forms of finance are often faster and easier to obtain than typical bank loans.
Types of asset finance
There are several types of finance solutions to purchase assets. These include hire purchase, finance lease, operating lease, novated lease and chattel mortgage.
Under a hire purchase, a business leases an asset from an asset provider, who purchases the asset and agrees to lease it to the business. Throughout the lease, the provider owns the asset (and is responsible for repairs, maintenance and insurance). The business makes ongoing payments to the asset provider during the lease period for the use of the asset. The business takes ownership of the asset at the end of the lease period. A benefit of a hire purchase is that it provides flexibility and can minimise cash flow issues. One way this can be achieved is by lowering monthly payments and making a larger payment (called a balloon payment) at the end of the lease period.
Under a finance lease, the asset provider purchases the asset outright with the agreement with the business that it will lease the asset over a fixed period. At the end of the lease, the business and provider both benefit when the provider sells the asset. A finance lease differs from a hire purchase in that the business has full responsibility over the asset when the lease begins. This includes repairs, maintenance and insurance. The other difference is that the business does not have the option of gaining ownership after the leasing period has ended.
An operating lease is a specialised type of finance lease for businesses that won’t need the asset for its full working life, as it is usually used to fulfil a contract or project. This offers a better alternative as the lease cost is based on the asset’s value over the time the business has agreed to use it, not the full life of the asset.
A novated lease includes a three-way agreement between an employer, employee and finance provider by which the employer leases a car for the employee. The lease is under the name of the employee. A single repayment includes the lease amount and running costs – such as insurance, fuel and maintenance. The employee pays the lease with both pre- and post-tax salary, reducing taxable income and lowering income tax due.
With a chattel mortgage, the asset being purchased is the collateral for a loan. Unlike a mortgage on real property, a chattel mortgage is for movable property, such as a vehicle or factory machinery. With a chattel mortgage, the lender can take the asset and liquidate if the borrower is not able to make repayments.
What are the benefits of asset finance?
When compared to traditional forms of finance, the benefits of asset finance include:
- Avoiding depreciation
- Eliminating unexpected costs
- Freeing up capital
- Improving cash flow
- Opening up an additional line of credit
- Reducing upfront costs.
In addition, it can save you time to get asset finance as getting bank term loans can take a lot of time.
What are the shortcomings of asset finance?
Some of the drawbacks include:
- Not owning the asset
- Not being a short-term solution.
Unsecured business loans for asset finance
Unsecured business lending could be a short-term solution to your asset finance needs. Also known as balance sheet lending, this type of finance is based on your financial information which includes accounting and bank data. Getting an unsecured online business loan from a fintech lender is usually a fast and simple process. With Moula, for example, the application can be completed in under 10 minutes and, once approved, the funds are transferred immediately. Learn more about equipment finance from Moula.
Be sure to read the fine print and check the terms and conditions because some loans include hidden fees and charges. For a quick and easy way to compare business loans, use the SMART Box™. Find out more in What is SMART Box™ and How Does It Help Small Business Owners.