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The idea of investing large sums of cash to improve or purchase new equipment or company vehicles may add to the everyday stresses of running a business. It’s understandable if you’re quite hesitant to spend your money on buying assets or equipment outright. Especially if that money is better off spent on other things in running your business such as employee wages and payment for other utilities and expenses.
If you’re looking to buy plant assets or vehicles for your business but don’t want to commit your working capital and tie it up with a depreciating asset, asset finance is the perfect solution for you.
Simply put, asset finance is the type of finance used by businesses to get assets and equipment they need to grow.
What is Asset Finance?
Asset financing is a specialised method of financing where the lender takes security over the asset being financed without the need for other collateral such as the borrower’s house and other properties. The asset being financed is usually a vehicle or a piece of equipment.
This financing solution is suitable for businesses that are already running for some time now. To avail of this option, the minimum requirement is at least 12 months ABN registered. If you are ABN and GST registered for at least two years, you can avail of a reasonably priced finance.
To help you understand this better, let’s look at Mike’s situation.
Mike is a tradie who has just finished a big job, but the service is yet to be paid by his customer. He has other jobs to pay for his bills and some money in the bank.
He wants to employ a carpenter but he knows it will take three months before he can start banking money from his work. Also, he needs to purchase a new ute and trailer for his new chippy. He can use his money in the bank as a buffer, but he’s concerned that his customer might not pay him on time. He has spoken to the bank about a small overdraft, but they want to refinance his home and had given him a rate nearly twice that of his home loan.
He has spoken to his accountant about his other options. He decides that asset finance is suitable for his situation. Asset finance will allow him to pay his bills in case a customer delays payment, commit to the new employee who can help expand his workload capacity, and keep his house in case something goes wrong with the business.
How does asset finance work?
Asset finance is generally structured in one of two ways: chattel mortgages or equipment loans and leases.
Chattel mortgages or equipment loans
Chattel mortgages or equipment loans are the most common types of asset finance. They involve a simple transaction whereby the funds are advanced to the borrower and are generally paid directly to the vendors of the asset whether that be the dealer or a private seller.
For example, the borrower wishes to purchase a company vehicle through asset finance. The borrower takes the title to the vehicle with a charge over that vehicle. So long as the payments are maintained and kept up-to-date at the end of the term, the security and the mortgage are removed over the asset.
A lease refers to an agreement between two parties, the lessor and the lessee, to rent an asset over a period of time. This agreement guarantees the lessor regular payments within the agreed time period. Asset finance through leases are less common, however, sometimes useful depending on the requirement of the asset, such as a novated lease* for an employee’s vehicle.
*A novated lease is a finance arrangement whereby employers pay for the lease out of a salary package. For example, the employee leased a car, under the novated lease arrangement, the car loan is paid from a combination of the employee’s pre and post-tax salary.
How to apply for asset finance?
Assessing the value of the asset being financed
The quality of the asset, its likelihood of resale, and recovery of the loan are all assessed in asset financing.
Generally, the attractiveness of an asset to a finance company runs on a scale of new or near new assets purchased from a dealer to old equipment purchased as part of a private sale. Interest rates for new or near new assets are lower than old ones. Still, it is important to note that if you get a great deal on an older piece of equipment, asset finance is still available.
Let’s say a piece of new machinery is being financed by the lender. This machine is given a unique identifying number such as a serial number. Since the asset itself acts as the security for the loan, the lender will need to gauge the value of the asset by assessing its quality, expected lifespan, or likelihood of resale to ensure loan recovery in case the borrower fails to repay the loan.
Establish your character in lending
Finance companies may look into your creditworthiness in two ways: “fast-track” and “full” assessments.
In a fast track assessment, borrowers who own a house and have been in business for two years can get approved for asset finance in as fast as two days with no financials. If you meet these requirements and you plan to purchase a new asset from a dealer, finance companies will extend finance up to a pre-determined limit of, let’s say $150k.
In a full assessment, the statement of assets and liabilities is submitted when applying. It is used to establish your character in lending and not as a security. What do we mean by ‘character in lending’? This refers to the position that the borrower is currently in.
Your statement of assets and liabilities will define your company’s creditworthiness. This allows the lender to gauge your financial capability to repay the amount you borrowed, but will not act as a security for the asset being financed.
Let’s have a look at this for example:
Mike has been running his business for two years. He and his wife are paying off their home and his work ute died. He had no bad marks on his credit score; he was paying off a house and had survived his first two years in business. Because of this, he had finance approved for his new ute within 48 hours.
What are the loan terms for asset finance?
Asset finance allows the borrower to purchase an asset (equipment, vehicle, etc.) without having to pay any upfront deposits. But the asset itself acts as the security for the loan.
The borrower is also given the option to tailor the repayments to match the current business cash flow. A balloon payment* may also be set for the loan.
Asset finance loans through the mainstream funders are at similar interest rates to current home loan rates.
*Balloon payments refer to the lump sum payment at the end of a balloon loan term. The amount is significantly larger than the amount paid monthly before the end of the term. In this setup, you get to set the balloon payment which is then approved by the lender.
The repayment period generally ranges from 1-7 years depending on the repayment amount and the total amount borrowed. The loan term may be shorter if the purchased assets are already used or second-hand, and also depending on the age of the asset.
Let’s say Mike likes to keep his vehicles up-to-date as he believes a well-presented vehicle is important to his business’ image. He has spoken to his broker and explained that he would like to trade his vehicles every three years when the warranty runs out and that his trade is generally around 30% of the new cost. With his current cash flow, he also worked out that his business can comfortably support repayments of $1,000 per month.
His broker then structures the deal with a balloon payment and a 36-month term which keeps the repayments at the budgeted level and allows the trade to pay out the balloon.
Asset finance is a fantastic solution for any business to fund any asset—ranging from vehicles, computers, trailers and trucks, tools, and machinery. It allows the borrower (you) to fund the procurement of assets that could generate money for the business without having to commit capital or your other assets. The lender relies on the value of the asset as the security for the loan.
If you’re looking into buying new machinery, trucks, or vehicles to increase your workload capacity while maintaining your current cash flow, asset finance is a good option for you. Give our Finance Team a call so we can provide you with a quote within the hour.
Rory Condon: 0427 224 442 | 4937 5608
Matt Noller: 0438 766 165 | 4620 4401
Nijo Antony: 0499 032 585 | 4937 5623
Connie Blunden: 4937 5616