Wondering what “asset finance” means? The term covers various forms of finance businesses use to acquire assets – from vehicles and machinery to equipment and IT systems.
You can get assets for your business by purchasing or leasing them. A few ways to finance assets include business loans, chattel mortgages, finance leases, hire purchases, novated leases and operating leases.
With asset finance, you can be spoilt for choice – and it might seem confusing!
But don’t worry. Here’s a handy guide to the main types of asset finance and how they’re used.
Business loans
This is probably top of mind when you think of business finance. A business term loan has a fixed term and a schedule of regular repayments, such as weekly, fortnightly and monthly.
Besides purchasing equipment, you can use this type of loan for many other purposes, including boosting working capital, overcoming a cashflow shortage, purchasing inventory or hiring staff.
Chattel mortgage
When you have a chattel mortgage, the asset you’re purchasing serves as collateral for the loan. Unlike a traditional property mortgage, a chattel mortgage is for movable property, including machinery and vehicles. If you have a chattel mortgage and fail to make payments, the lender can take the asset to recover the amount you still owe.
Finance lease
If you use this form of business asset finance, the business providing the asset (the financer) buys the asset outright with an agreement with the company using the asset (the borrower) that it will use the asset for a fixed term.
Unlike a hire purchase (see below), the borrower using the asset takes full responsibility for the asset when the lease starts. This includes things like insurance, repairs and maintenance. The other difference is that they do not get the option to purchase the asset at the end of the lease.
Hire purchase
With this type of financing, the asset provider (the financer) purchases the asset and leases it to a business. During the lease, the business makes ongoing payments to the asset provider, who owns the asset and is responsible for maintenance, repairs and insurance (unlike a finance lease).
One option you get with a hire purchase is to make a larger payment at the end of the lease (called a ‘balloon payment’). This option can be helpful if you’re a borrower and want to make small payments during the lease to minimise cashflow issues.
Novated lease
With a novated lease, there’s a three-way agreement between an employee, employer and a finance provider in which the employer leases a vehicle for their employee (with a lease under the name of an employee). The repayments include the lease amount plus the operating costs – such as fuel, maintenance and insurance.
By paying for the lease with pre- and post-tax salary, the employee can reduce their taxable income and tax bill. While not a typical form of business equipment financing, it can be used for businesses as an employee benefit.
Operating lease
You can use this form of equipment leasing if you don’t need to use the asset for its full working life – for example, to complete a project or fulfil a contract. This may be a better alternative for short-term use because the lease cost is based on the asset’s value during the time it’s used by the business, not the entire life of the asset.
What are the benefits of using asset finance?
This will depend on the asset finance options you’re considering and your situation. Some of the potential benefits of asset finance include:
- Avoiding asset depreciation
- Freeing up capital
- Improving cashflow
- Reducing the upfront cost of acquiring assets
- Eliminating unexpected costs.
What are the shortcomings of using asset finance?
Some of these include:
- Not being able to take ownership of the asset (depending on the form of asset finance)
- Not a short-term solution if you need an asset for a short time (unless you get an operating lease).
Another big drawback of not purchasing an asset is temporary full expensing that enables you to write off the full cost of an asset in the financial year it was purchased and used. If you’re not purchasing the asset, you can’t take advantage of this tax break.
Looking for a tax break? Here’s more on the Instant Asset Write-Off in 2022.
Online business loans for asset finance
While traditional asset finance options have been available for a long time, more small businesses are turning to online business loans to finance equipment, machinery and other assets.
Available in secured and unsecured versions, Lumi business loans can help you access the funds you need to purchase business assets.
For larger asset purchases, Lumi Lux secured rate-reducing business loans range from $200K to $500K, with interest rates from 14% to 20% (APR) and loan terms up to 4 years.
With Lumi Lux, the interest rates decrease by 25 basis points every six months (when repayments and other loan conditions are met). For example, a loan with a starting interest rate of 20% will decrease to 19.75% six months after the settlement date and to 19.50% at 12 months.
Get all the details about Lumi Lux.
