In Australia, asset finance has become one of the most significant sources of funding for companies in need of business assets without making a lump sum payment for their acquisition. In this way, construction companies purchasing heavy equipment, logistics firms increasing their vehicle fleets, and many others can use the proper financing approach to get the necessary assets while managing the company’s working capital.  

Still, asset finance is not just borrowing money. The knowledge of various financing approaches, costs of financing and requirements for borrowers are essential.  

What Is Asset Finance? 

Asset finance enables people or organizations to obtain an asset based on a financial arrangement whereby the asset repayments occur over a certain period of time. In some cases, the financier could have security on the asset, while in other cases, the financier could own the asset throughout the arrangement period.  

In Australia, asset finance is used by most people to acquire vehicles, trucks, construction equipment, manufacturing equipment, medical equipment, and agricultural equipment.  

As opposed to paying cash upfront to make one single purchase, companies are able to pay for assets gradually and hence conserve their liquidity for various other expenses. 

Types of Asset Finance in Australia 

Different finance structures suit different assets, ownership preferences and business objectives. 

1. Chattel Mortgage 

Chattel mortgages are often used when businesses acquire vehicles or equipment for business purposes. In such cases, the borrower acquires ownership of the asset right from the beginning, whereas the lender places a mortgage on it until the loan amount is paid. 

The choice to include a balloon repayment at the end of the financing period can give businesses the flexibility to lower monthly payments through a higher final repayment amount. 

The GST and tax treatment depends on the borrower’s circumstances, the asset’s use and applicable rules. Eligible businesses registered for GST may be able to claim input tax credits, subject to the relevant requirements. 

2. Finance Lease 

Under a finance lease, the financier generally purchases the asset and leases it to the customer for an agreed term. The customer makes regular payments for its use, with end-of-term options determined by the contract. 

This structure may suit businesses that want access to equipment without purchasing it immediately. However, ownership, residual-value obligations and end-of-term costs must be assessed carefully. 

3. Operating Lease 

The operating lease is an agreement through which the customer gains possession of an asset for a specific duration, though ownership is not transferred. Depending on the contract, the asset could be returned after the duration of the contract. 

This type of agreement is suitable for companies that require changing equipment or vehicles periodically. The conditions set in the agreement need to be looked at carefully. 

4. Equipment and Machinery Finance 

Equipment financing is employed to finance assets like excavators, cranes, forklifts, manufacturing machinery, and medical equipment. 

The lender will look at the resalable value of the equipment, its age, condition, the supplier, the purpose of use, and its lifespan. Different lending terms can be offered depending on whether the equipment is new or used and how specialized it is. 

What Does Asset Finance Cost? 

The total cost of asset finance depends on more than the advertised interest rate. Businesses should evaluate the complete cost of the agreement before comparing offers. 

Key cost factors include: 

• • Interest rate: Influenced by the lender, loan structure, credit profile, asset type and perceived risk. 

• • Deposit: A larger upfront contribution may reduce the amount financed and could improve the application profile. 

• • Establishment and administration fees: Some agreements include application, documentation or account-keeping charges. 

• • Loan term: Longer terms may reduce regular repayments but increase the total interest paid. 

• • Balloon or residual payment: A lower regular repayment may be offset by a substantial payment at the end of the agreement. 

• • Insurance and maintenance: These expenses can materially affect the overall cost of operating the asset. 

• • Early termination costs: Ending an agreement early may involve additional charges or a payout amount that differs from the outstanding principal. 

For example, financing a $100,000 vehicle with a deposit of $10,000 means the initial amount financed is $90,000, before fees and other adjustments. Actual repayments will depend on the interest rate, term, repayment frequency and any balloon payment. 

When comparing finance offers, businesses should request a repayment schedule and total payable figure rather than relying solely on the monthly repayment. 

Asset Finance Eligibility in Australia 

Lenders assess whether an applicant can service the proposed repayments and whether the asset provides acceptable security. 

Business Financial Position 

Lenders will analyze the finances of the business through financial statements, tax statements, business activity statements and bank statements. This analysis will help the lender know whether there is good turnover, profits, cash flow and liabilities. Good turnover does not guarantee a loan if there is poor cash flow. 

Credit History 

Business and personal credit rating can both be applicable, especially in small businesses and corporations where the directors make personal guarantees. Defaults, repayments and credit commitments in the past can influence the evaluation. 

Trading History and ABN 

An already existing firm might prove their consistent trading record by means of historical financial data. However, new firms might experience extra evaluation, which is dependent on the lending institution and strength of the application. 

Asset Type and Deposit 

The asset’s value, age, condition and resale prospects can influence the amount a lender is prepared to finance. A deposit may be required, depending on the transaction and lender policy. 

Documentation 

Applicants may need identification, ABN and business details, financial statements, bank statements, a supplier quote, asset specifications and information about existing debts. Documentation requirements vary according to the applicant and finance structure. 

How to Choose the Right Asset Finance Option 

Before application, the business needs to determine the use of the asset, its expected life span and usefulness to generate income. This means that repayments must still be within manageable limits in case there is a reduction in income or the asset stops working.  

The cost of ownership, terms of each financing option, the tax implications, the liabilities incurred and the flexibility of each must be evaluated against one another. The tax rules in Australia for each form of asset finance may differ so businesses must consult with an accountant.  

Businesses can also work with a finance broker to compare various lending options and the documentation involved. Nevertheless, the decision and pricing will depend on the lender chosen. 

Conclusion  

Asset finance may help Australian businesses purchase necessary equipment or vehicles while keeping their working capital. The most suitable one would depend on the type of asset, cash flows, the aim of ownership and the financial condition of the company. 

A knowledge of the distinctions between chattel mortgage, finance lease and operating lease and the total cost of these products may contribute to good financing choices. 

If the company needs advice regarding asset financing for its next acquisition of equipment or vehicles, FLI Group may provide assistance to identify the best finance product according to the conditions of the business.