To decide the right equipment loan facility for a business, align the features of the loan with the accounting method, balance sheet and tax objectives. Selecting the right asset finance facility is an essential step in sourcing financing. Businesses are offered a range of different types of loans, each with its own set of features and benefits. The same selection of lending products can be used to finance all types of business assets including plant, machinery, and equipment.
The features of different lending products work with different accounting methods and have varying approaches to how the asset is treated in the balance sheet. Lending products also offer varying end-of-term payout processes, different tax deductions and different interest rates.
To ensure businesses realise the optimum benefit from their finance, they need to select the most suitable lending product. While your broker will find you the best loan offer, it is your accountant that will provide expert advice on the right equipment loan.
First Step in Choosing Right Equipment Loan
The first step is to consider the accounting method used by the business to prepare its accounts. Businesses may use the accruals or the cash method. The accounting method is usually determined when the business is set up and can only be changed at the start of a new financial year.
The Leasing finance and Rent-to-Own Loans are only compatible with the accruals method. Chattel Mortgage is only compatible with the cash method. Commercial Hire Purchase can be used with both methods of business accounting.
Equipment Loan and the Balance Sheet
The approach taken by the business to their balance sheet is a critical consideration in selecting asset finance. This involves how the equipment being purchased with finance is posted to the books – the balance sheet, as an asset/liability. A business that has ownership of an asset must post it to their balance sheet.
Lease and Rent-to-Own do not require the business to post the equipment being financed to the balance sheet as the lender has ownership of the equipment until the loan is fully repaid. Chattel Mortgage and CHP differ in this respect. The business takes ownership of the asset as soon as the finance is settled and must post it to their balance sheet.
Small and new businesses may have a preference for loans that do not require posting to their balance sheet. The equipment is an asset and the finance is a liability. In the initial term of a loan, the weight of the liability would be greater than the amount of the asset owned. Not posting the asset can improve the appearance of the balance sheet and may improve the business’ prospects for securing finance for other purposes.
Equipment Loan Tax Benefits
Businesses may select a credit facility based on the tax benefits available. All offer tax deductions but the deductions are calculated and realised differently. Lease and Rent-to-Own have fully tax-deductible monthly payments. When the annual accounts and tax return is prepared, the amount of loan payments made over the 12 months are deducted from tax payable income.
Chattel Mortgage and CHP derive a deduction through asset depreciation. The asset is depreciated by a set percentage, as set by the ATO depreciation schedules, each year. As the value of the asset decreases each year, the amount of the deduction will depreciate each year. The asset is depreciated until the full value is accounted for. This is known as fully depreciated. Interest is also deductible.
Asset Finance Terms and Rates
When considering finance options, one of the first things most operators will notice is the difference in interest rates. Chattel Mortgage and CHP offer the best rates, Leasing slightly higher and Rent-to-Own attracts the higher asset finance rate. This is standard across the market, but lenders set their own rates.
Asset finance rates are typically fixed. When the RBA announces a cash rate change, there would be no change to the rate on your equipment loan.
While it can be tempting to select the finance facility with the lowest rates, as discussed above, there are many other issues to take into consideration.
Terms on asset finance are arranged in the same way for all credit facilities. As brokers we negotiate with lenders to achieve the most suitable rate to meet customer expectations. Up to 7 years/84 months can be achieved for many businesses.
End of Equipment Loan Term Payouts
All asset finance products offer the option for a lump sum end of term payout with differences with each loan type. While this feature may not be significant to selecting finance products, it may be advantageous for business owners to fully understand their options.
Leasing includes a residual. This is a percentage of the amount borrowed which is payable at the end of the term. The percentage of the residual is subject to ATO schedules.
Chattel Mortgage and CHP include the option to include a balloon in their finance. This is a percentage of the loan that is set aside for payment in full after the final monthly payment. The difference between a balloon and residual is that a balloon can be negotiated with the lender. It is not subject to ATO rulings.
Rent-to-Own borrowers have the option to take full ownership of their equipment by negotiating a buyback at the end of the loan term.
Assistance to Secure the Right Equipment Loan
With so many issues to consider, operators can benefit from using experts to assist them secure their most suitable financing. Consult with an accountant on choice of facility and our specialised broker service to source and secure the most competitive offer.
For the right equipment loan for your business, speak with Jade Equipment Finance 1300 000 003.
DISCLAIMER: IF MISINTERPRETATIONS, MISREPRESENTATION OR ERRORS EXIST IN THIS ARTICLE, NO LIABILITY IS ACCEPTED. THE INFORMATION IS PROVIDED ONLY FOR GENERAL PURPOSES AND NOT IN ANY MANNER INTENDED AS THE ONLY SOURCE FOR MAKING FINANCIAL DECISIONS. THOSE WHO CONSIDER THEY REQUIRE ADDITIONAL GUIDANCE OR ADVICE SHOULD REFER TO AN INDEPENDENT FINANCIAL ADVISOR.
