How To Get The Most Out Of Your Asset Finance Arrangements
Asset finance can be a useful tool for business owners as it provides the means to purchase equipment and other assets needed to run your business, without having to invest your own capital upfront. Both start up and established business owners can benefit from asset finance, so here we discuss the advantages, requirements and how it differs from a typical loan.
1) What is asset finance and how does it differ from traditional lending?
It’s a type of loan that businesses use to purchase equipment or upgrade capital expenditure, most commonly to purchase assets like motor vehicles, machinery and fit outs.
The difference between asset finance and a typical business loan is that the business owner uses the goods they are purchasing as security, as they are used to generate income. This is carried out as a fixed loan for a specified duration, generally between one and five years, whereas standard business loans require a business owner to provide additional collateral security, for example a commercial or residential property.
2) What is the main benefit of using asset finance?
Businesses can finance an asset without having to part with too much of their own money. They can keep their cash flow and not have to provide additional security, which helps business owners who may not have the necessary cash on hand to upgrade or start up their small to medium business in the first instance.
3) What does a business owner need to provide to qualify for asset finance?
Generally, a financier requires an owner to provide bank statements from the previous financial year, an assets and liabilities document of each business director, and to advise the bank of any adverse credit file or owing ATO payments upfront to avoid any roadblocks to the approval process.
When financing a start up, a business owner will typically be asked to provide a business plan and cash flow projection prepared by an accountant. As long as a credible business plan has been provided with accurate cash flow projections and industry experience, many banks will lend to a start up business.
4) What are some valuable tips to consider when financing a motor vehicle for your business?
Obtaining pre-approval prior to negotiations will assist with bargaining power and is always encouraged.
In addition to this, it is important to know what is included in the deal you are looking to secure. In the case of purchasing a company vehicle, an offer might state “0% interest” however it is likely the usual value of the interest will be built into the purchase price as the dealership needs to recover that cost regardless, so it is important to do due diligence on what is specifically included.
5) What fees are involved in securing asset finance?
Generally a once off fee of $300 to $400 is required, however if you need to pay a deposit on your asset, this can be reimbursed through the loan. Using the previous example of purchasing a company vehicle, it is always important to let the dealership know it’s subject to finance.
Additional costs can include ‘break costs’ which will be charged if you need to release yourself from the loan, as it is a fixed contract.
6) What if you’ve already bought equipment previously and then decide you don’t have enough cash flow?
Another key benefit with asset finance is that you can undertake what’s known as a ‘sale and lease back’, which gives business owners an opportunity to seek finance on equipment they have already paid for with their own money.
To obtain this, a business owner must ensure they apply for the finance within 90 days of purchase and are able to provide the receipts. This will then be reimbursed to the client.
7) Can you finance business assets through a private seller?
You can purchase privately, even if the seller isn’t registered for GST.
Any assets up to three years old are still considered new, however different lenders do have longer lifespans for certain types of equipment typically ranging up to ten years. Essentially, it depends on the age of the asset you are looking to purchase.
Whilst this is permitted, it is important to refer to the Personal Properties Security Register, which ensures an asset (like a motor vehicle) hasn’t been in any accidents or previously written off. This checking process is always taken out on registered assets.
8) How does asset finance work for a fit out?
The financier generally does not allow lending for soft costs which are labour and installation. For hard costs, such as physical, tangible assets like ovens, desks ie. removable items, the bank will generally allow for up to 80% to be financed.
Understanding what’s involved in obtaining asset finance can provide the benefit of freeing up cash flow to start up or grow your existing business, with less collateral than a regular loan.
Take a Listen
If you’d prefer to listen to subject matter expert Sharon Piening, discuss this topic, check out episode 6 of The Bottom Line. Sharon talks about how structuring your asset purchases correctly can improve the flexibility of your business.