On and Off Balance Sheet Finance Options

There are several finance products available to businesses to finance the purchase of equipment including trucks, heavy and light machinery and most general business assets. Jade Equipment Finance offers all of these types of finance: Chattel Mortgage, Rent to Own, Leasing and Commercial Hire Purchase. Each finance product has its own features, which offer benefits based primarily on differing business structures and individual financial objectives.

The ‘balance sheet entry’ is a feature which is one of the key differences across finance types. That is, they are either ‘off balance sheet’ or conversely ‘on balance sheet’.

Explainer

  • When taking out finance on an asset acquisition, the asset is entered into the balance sheet through the company accounts, as an asset/liability. Over time as the finance is repaid and the asset is depreciated in line accounting and ATO guidelines, the value of the balance of the equipment as an asset or liability varies accordingly.
  • When taking out finance, the type of finance product will determine if the asset is listed on the borrower’s balance sheet or on the balance sheet of the lender.
  • If the asset appears on the borrower’s balance sheet it is ‘on balance sheet’.
  • If the asset appears on the lender’s balance sheet it is termed ‘off balance sheet’. Meaning it is off the balance sheet of the borrowing company. This is commonly considered as ‘improving the balance sheet’ of the borrower because the equipment is not listed as liability/asset in their accounts.
  • This is determined by which business actually holds ownership of the asset - the lender or the borrower – and that varies depending on the type of finance.
  • The accounting method used by a business – either the cash accounting method or the accruals accounting method – will also have a bearing on the choice of finance type.

Finance Types: Differences

  • Chattel Mortgage is an ‘on balance sheet’ type of finance. When equipment is purchased via lender finance, the borrower holds ownership to the equipment and the lender holds a mortgage over the equipment until payments are made. This type of finance is suited to companies that use the cash accounting method. The asset appears in the accounts of the borrower and is depreciated according to regulations.
  • Rent to Own and Equipment Leasing are known as ‘off balance sheet’ finance. The equipment is technically purchased by the lender and rented or leased to the borrower. The lender is technically the owner of the equipment while the borrower has full use of the asset and is responsible for the ongoing expenses. As the lender ‘owns’ the equipment, it appears in their accounts and balance sheet as an asset/liability. When the borrower finalises all payments including the residual or buyback, the ownership is transferred to the borrowing company.
  • Rent to Own Finance and Equipment Leasing are best suited to businesses implementing an accruals accounting method.
  • With off balance sheet finance, the monthly finance payments are considered as an operating expense and are tax deductible and subject to GST. (GST is not applied to the interest portion of the payment).
  • With Chattel Mortgage, an on balance sheet finance type, the monthly repayment is not fully tax deductible, only the interest portion is deductible. However, the business is receiving the applicable depreciation on the asset over time as a tax deduction. GST is claimed on the full purchase price at the time the finance is taken out, on the next BAS return, and therefore not applicable/claimable on the monthly repayments.

Which is better? The Decision

Deciding which is the best finance for your business and the equipment you are purchasing, will be determined by how your business is set-up for accounting and your individual financial objectives. At Jade Equipment Finance it is not our role as your broker that advise on that decision. We advise that you consult with your accountant on that matter as they will be best-placed with the detailed knowledge of your business to assist you.

When briefing your Jade consultant, simply advise which type of finance you are seeking and we will source you the most competitive quote.

The finance type does not usually affect the interest rate offered for business equipment loans. The interest rate is determined by other factors including the equipment being purchased, individual lender requirements and guidelines, how lenders assess your level of risk and other general economic issues.

Sourcing Better Equipment Finance

As your finance broker, Jade Equipment Finance is ideally positioned to source you a quote from our large lending panel of both banks and non-bank lenders. We are accredited with many lenders including non-bank lenders that specialise in equipment and in key industries as well as lenders that only work through brokers. By engaging Jade as your broker, we provide access to a broad range of finance sources to offer you more options and achieve a better overall equipment finance offer.

Whether you are seeking an on or off balance sheet finance solution, your Jade Equipment Finance consultant can source you the best quote at the cheapest interest rates.

To discuss the equipment finance options available for your business, contact Jade Equipment Finance on 1300 000 003

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