Commercial & Asset Finance

Asset Finance

For many businesses, it can be extremely difficult acquiring the assets they need to run their operations as capital is scarce.  This is where asset financing comes in. 

It is a type of loan that helps businesses purchase assets. They obtain it through a financier, often on a lease basis, with the asset used as collateral for the loan.  Below we discuss the different options available.  

As a result, businesses can still operate and expand without tying up a large amount of capital in equipment and operational assets.  The utilisation of asset finance covers this initial outlay, and in the event of a default, there is a possibility that the asset can be repossessed. 

Commercial Finance

Commercial finance is usually provided to help purchase or refinance commercial real estate, industrial and retail assets for either owner-occupiers or investors.  

Businesses may also require commercial finance to facilitate the purchase, lease or expansion of a business, as well as to assist with cash flow lending. 

Furthermore, commercial finance can be used to purchase specialised real estate assets such as pubs, hotels, motels, petrol stations, caravan parks, retirement villages and childcare facilities. 

Vehicle Finance

Whether you need one vehicle or a fleet, are a sole trader, company or partnership, we can help you acquire vehicle finance to match your business structure, cashflow needs and tax considerations.  Vehicles can include cars, vans, utilities, and light commercial trucks.  

With urgent requirements, we can provide an indication of loan or leasing products available, interest rates, and repayment options available to you. 

We also offer a vehicle sourcing service where we can assist you to find the right vehicle, negotiate the best price and organise delivery. 

What is asset finance used for?

Asset finance can be used to purchase: 

• Heavy machinery used for industrial businesses (manufacturing, construction, farm, agriculture) or industrial kitchen assets 
• Earthmoving and mining equipment  
• Fit-outs and installations  
• Vehicles, including forklift trucks, vans or a fleet of cars (also known as vehicle finance) 
• Office assets such as computers, laptops, printers, desks, chairs and other furniture 
• Technology, including high-tech assets and servers 
• Medical and scientific assets 

Pros	Cons
It means you do not own obsolete assets. There may be an option to upgrade the asset at the end of the loan or it can be taken back by the financier	More expensive than buying the asset outright. Current accelerated depreciation tax options and COVID stimulus measures cannot be utilised
Only the asset secured by the loan can be repossessed in case of default	Failure to repay means losing an asset that is probably essential to the business’ operation
More streamlined process than obtaining a business loan, less paperwork required and less stringent	Long repayments with higher interest rates and fees
Fixed monthly repayments and interest rates make budgeting easier	Low valuations of assets and depreciation can affect the amount being borrowed especially if unique or specialised

Which type of asset finance?

There are several different types of asset financing and determining the right one depends on the business and the type of asset needed. For example, at the end of the loan term, and with all payments made, the asset could belong to either the borrower or the lender. When deciding on a type of loan, our team will work through important considerations with you such as:   

• How long will the asset be required? 
• Will it need to be replaced after a certain period of time?  
• How quickly is technology evolving in the specific industry? 

In deciding the financing structures, further consideration takes into account:  

• How GST is treated 
• Off or on balance sheet asset/liability 
• Ownership of the asset over the time of the loan 
• Ownership of the asset at conclusion of the loan 
• Tax-deductible amounts 
• Asset depreciation 

The decision as to which loan product is best suited to your asset purchase is not determined by what you are purchasing; as all products are available, for all types of business asset acquisitions.

The deciding factors are based primarily on your accounting methods, treatment of GST, tax deductions, asset depreciation and balance sheet plan.

Our advisors will work with you and your Accountant to assist you in ensuring the most suitable loan is chosen.  

Description of the different types of asset finance 

• Chattel mortgage - a borrower will purchase and own the asset with a loan from a lender. The asset is used as security. 
• Commercial hire purchase - the financier purchases the asset and leases it to the business with fixed repayments over a specified period. The financier owns the asset until all payments (including interest) are made, at which time ownership of the asset will transfer to the borrower. 
• Operating lease - similar to a commercial hire purchase, except the asset belongs to the lender at the end of the lease. Alternatively, it can be purchased by the borrower at an agreed price. This type of finance lease is ideal in industries where assets are subject to shorter depreciation treatments or obsolescence. 

Difference between asset-based lending and asset finance  

Asset-based lending uses assets owned by the company as collateral for a loan, compared to asset finance which is used to fund the purchase of asset, A business will use these assets to acquire finance instead of being subject to a lender’s analysis on their cashflows.  

The assets that a business can use as collateral include inventory, accounts receivable, machinery or property. The loan amount cannot be greater than value of the asset being used as collateral. The loan term cannot exceed the lifetime of those assets and the lender will include depreciation. 

Funding secured by asset-based lending is generally used for short-term requirements such as: 

• Purchase of raw material or stock; 
• Current working capital requirements; 
• Funding growth; 
• Wages; 

Advantages and disadvantages of asset-based lending 

Pros	Cons
Usually easier to obtain than a business loan or asset finance given less strict lending criteria	Loan amount can be significantly affected by a low valuation of assets and depreciation
Fixed monthly repayments and interest rates make it easier to budget and forecast	Not recommended as a long-term funding solution
In the event of a default, only the assets used as collateral can be repossessed	In the event of a default, could lose an essential asset to the business’ operation

Asset-based funding is a financing option used by businesses where their financial situation inhibits the ability to acquire funding by other means.  This includes start-ups and small companies who do not possess a financial history or credit rating of more established businesses. 

Other types of Commercial Finance

There are a wide range of other options for businesses:   

• Business loan / line of credit 
  To assist with business cashflow, a line of credit enables funds to be drawn-down, repaid and drawn again. Repayments are flexible and interest is charged based on the balance and only when the account is used. Fees usually apply based on the full credit limit. A flexible source of commercial finance, without fixed repayments or the need to reapply.Usually used for planned or operational expenses (e.g. payroll, stock, etc). 
• Business overdraft
  A business overdraft is like a business line of credit but usually attached to a regular business bank account.  Transactions and withdrawals can be made up to an agreed amount, or limit of the account. Funding can be drawn and redrawn up to that limit without the need to reapply.Usually used for short-term working capital needs and unexpected expenses. 
• Business credit card
  A revolving line of credit like a business overdraft, but not attached to a transaction account. Usually used for minor expenses and repaid within the same month, otherwise, it can attract high fees.Due to the high interest rates, it is generally not recommended for cash flow and operating costs, unless repaid within the same month however it is worth noting some business credit cards generate rewards points.  
• Invoice / debtor finance
  A line of credit or upfront funds based on the business’ unpaid invoices. Two main variations; invoice factoring and invoice discounting. With factoring, the invoice ledger is sold, and the responsibility of invoice collection is transferred to the lender. With discounting, the invoices are used as security and invoices collection stay with the business.Used to help with day-to-day cash flow needs, whilst waiting for invoices to be paid.