Many mortgage brokers can help with your home loan and your business loan. There are several types of commercial and asset finance, so make sure you know the differences. Then you can decide which one will suit you.

What is commercial finance?

Commercial finance is an umbrella term for different kinds of business loans. They’re designed to help manage your capital and cash flow.

Types of commercial finance

Business overdraft: Your financial institution allows you to overdraw your existing business account up to an approved limit. You can only access the overdraft after your own funds have been used. The lender charges interest on the overdrawn amount. Businesses often use overdrafts as small loans, usually to cover cash flow gaps.

Line of credit: A long-term arrangement between a business and a lender, where the business can access funds up to an approved limit. The business may borrow all or part of the money at any time, but only owes interest and makes repayments on the amount used. Accessibility and flexibility are key here.

Term loans: A business borrows money and repays the lender in set amounts over a set period. Good for businesses that like predictable repayments.

Commercial rate loans: Also known as business markets loans. A business borrows a single loan amount, which can be spread across a combination of components, such as floating rates, fixed rates and cap rates. This helps to protect against interest rate movements.

Cash flow finance: A way for a business to get cash before their customers actually pay. There are two common methods used by businesses:

• Invoice discounting is where a business accesses a percentage of their debtors’ unpaid invoices through their lender, and the lender uses the debtors as security.
• Invoice factoring is where the lender assumes responsibility of the business’s debt ledger and chases payments on its behalf.

Both attract a fee and are designed to service the cash flow gap between outgoings and income.

What is asset finance?

Asset finance includes a range of different loan structures that can help your business buy vehicles or equipment.

Types of asset finance

Chattel mortgage: Also known as an equipment loan. A business borrows money to purchase an asset. The business owns the asset outright, but the lender uses the asset as security until the business repays the loan. This frees capital and ensures the business has security against the loan.

Hire purchase: The lender purchases the equipment and rents it to the business. At the end of the term, assuming all payments are made, the business takes ownership of the asset. This is a popular way to spread the cost.

Finance lease: The lender owns the equipment and the business pays a hire fee for use. In some cases, the business may be able to purchase or refinance the asset at the end of the set term, which gives flexibility.

Operating lease: The lender owns the equipment and the business pays a hire fee for use. The business does not take ownership of the asset. The costs are deemed operational expenses.

Novated lease: A Novated Lease involves a three-way agreement between an employer, an employee and a lender. The Novated arrangement involves the employee leasing the vehicle directly from the lender. The employer will then agree to deduct lease rentals from the employee’s salary during the term of employment and to pay the rentals directly to the lender. The employee has the use of the vehicle for personal purposes.

Whether it’s cash flow or capital, businesses need money. It’s good to know there’s a loan to suit every business. Contact your mortgage broker for more information about commercial and asset finance.

As a business owner, it’s likely you have no shortage of competing demands on your capital. In your quest for growth, you might want to hire additional staff, move to bigger premises, increase production capacity, diversify your product range or spend more on marketing.

Using traditional loans or cash to pay for new equipment and vehicles can put a strain on your cash flow and tie up funds that could be used to help your goal of growing your business.

Asset finance can be a more economical option. It can allow you to obtain the assets you need to expand without incurring the high upfront costs associated with buying vehicles and equipment.

Instead of acquiring an asset outright, asset financing allows you to spread the expense into more manageable, monthly payments over an agreed term.

Asset finance explained

There are two main types of asset finance: finance leases, also known as hire purchase agreements; and operating leases.

A finance lease allows your business to buy a vehicle or equipment on credit. Your chosen lender purchases the equipment on your behalf and you pay it off in instalments. Once you’ve paid the last instalment, you have the option to purchase the item for a specified sum. This amount is referred to as a residual or balloon payment.

An operating lease gives your business the use of a vehicle or piece of equipment for the term of the lease agreement. After that time, ownership of the leased item reverts to the lessor.

The Australian Tax Office allows some lease payments to be treated as tax deductible expenses. Other lease payments are treated as depreciation expenses. It’s important to talk to your accountant or tax adviser before entering into an asset finance agreement to ensure you understand the tax implications for your business.

There’s almost nothing you can’t lease

In the past, most leased items consisted of what were known as ‘hard assets’ – tangible, physical items with a readily ascertained resale value. Think buildings, motor vehicles, machinery, heavy equipment and the like.

Today, businesses can lease a much broader range of items, including a vast array of ‘soft assets’. These can be intangible items whose resale value is negligible, or difficult to determine. They can include kitchen and catering equipment, fitness equipment, audio-visual equipment, office furniture, security systems, telecommunications infrastructure and computer hardware and software.

Many business owners choose to lease the hardware and software they need to run their enterprises, rather than buying it outright. It’s also possible to include intangibles, such as cloud storage and network support, in an asset finance agreement.

Leasing information technology products and services can allow your business to avoid the high upfront costs that can put these assets out of reach for smaller enterprises. Information technology changes quickly, and leasing, rather than buying, can mean you’re not locked in to an ageing or obsolete solution because you don’t have the funds to replace it.

Lease terms can vary from as little as 12 months to as long as seven years. Soft assets generally have shorter lease terms while hard assets, which depreciate more slowly, are typically leased over longer periods. The longer the lease term, the lower the monthly repayments will be.

Want to know more?

Having ready access to the assets you need to run and grow your business is important. Without it, you may not be able to take advantage of opportunities to expand, diversify and build your bottom line.

Using asset finance to acquire items can help you spread the cost of expensive items over a manageable period and reduce the chances of a cash flow crunch derailing your growth.

A broker can talk you through the range of finance options that may be available to your business. They can help you identify and secure the commercial finance that best meets the needs of your growing enterprise.