Businesses in Australia are increasingly turning to asset finance as a way to grow and expand by making it easier to get their hands on crucial equipment and assets like vehicles, plant and machinery.
Using asset finance allows businesses to avoid having to come up with large sums of money upfront to buy these major investments, instead spreading the cost over time with smaller payments.
Fees and charges are added to repayments over a fixed term, during which the business will have full access to use the asset and at the end the asset may return to the finance provider or will end up being owned by the business.
Five types of asset finance
1. Hire purchase
A simple form of asset finance, a hire purchase arrangement sees a lender or third party purchasing the asset for a business to use.
Over a fixed term the business makes payments so they can hire and use the asset. When the fixed term expires the business has the option to purchase the asset for an additional, nominal fee.
2. Finance lease
In a finance lease, a leasing firm agrees to buy a business asset on behalf of the business that needs it, and then rents it out to that business.
The business makes monthly payments for the primary rental period until the cost of the asset is covered (plus interest payments).
Once that time arrives, the business has the option to either extend the rental period, return the asset, or sell the asset on behalf of the leasing firm.
3. Equipment leasing
If a business likes the sound of a finance lease but would like to own the asset after the end of the contract, they can instead take up equipment leasing.
An equipment lease is a fixed term where a business rents equipment from a vendor or leasing firm and makes regular payments to use it.
Unlike hire purchases or finance leases, in equipment leases it’s the firm that is responsible for the maintenance and upkeep of the asset, not the business.
Once the rental period is over, the business can extend the lease, return the asset to the lender, upgrade to a newer asset or buy it outright by paying a balloon payment.
4. Asset refinance
There are two types of asset refinance – one where business use their existing assets as security against a loan and the other which is called asset-based lending.
In that first category, the asset becomes collateral and of course can then be sold by the lender if the business fails to service their loan.
For this type of asset finance, once all payments have been made (including all the fees and interest) the asset returns to the business owner in full as it was before.
In the asset-based lending category, the business sells a hard asset to a specialist finance company and then leases it back from the lender.
This means a business can free up significant cash flow by paying it back over a longer period of time in smaller repayments while getting to use the asset at the same time.
Once the repayment period is up the loan is over but the finance company now owns the asset and the business has the option to either keep renting it, walk away or buy it back again for an agreed amount.
5. Contract hire
Contract hire is asset finance for vehicles and is used by businesses who want to save time organising and maintaining their own car fleets.
It works by a provider sourcing and maintaining the fleet while the business pay regular instalments over an agreed term, at the end of which the provider is responsible for the disposal of the vehicles.
If you think asset finance sounds like something that could help your business expand, then your business is eligible if you can meet the financial obligations.
From sole traders, partnerships, limited companies to startups, there’s an asset finance product from a variety of providers to suit all needs.