Business loans can be confusing and it takes an experienced finance broker to help you find one that suits your business finance needs. It is important to know the different products available for both asset and commercial finance, so that you can make the right decisions about the structure of your loan.
Asset finance includes loans that business owners may need to help their business buy vehicles or equipment. There are several different asset finance structures, and they are broken down below.
Chattel Mortgage – also called ‘equipment loan’, is a loan that allows a business to purchase an asset so that the business owns it outright. The lender uses the asset or equipment as security until the loan is repaid.
Hire Purchase – the lender purchases the equipment and then rents it to your business. At the end of the rental term, once all payments have been made, the business can then take ownership of the asset. Hire purchase is a tax effective way to spread deductible costs over time.
Finance Lease – your business pays a hire fee to use equipment that the lender owns. It’s similar to a hire purchase loan, although in some cases your business can purchase or refinance the asset at the end of the rental term, which means more flexibility for you.
Operating Lease – Similar to hire purchase and finance lease, your business pays a hire fee to use equipment that the lender owns. The key difference is that your business doesn’t take ownership of the asset upon the contract term’s completion. As there is no residual ownership of the equipment, the hire costs are considered operational expenses.
Novated Lease – this is an arrangement between a business, an employee of the business and a lender. The lender leases equipment (usually a vehicle) directly to an employee. The employer (business) deducts lease payments directly from the employee’s salary during the term of the novated lease arrangement, and makes the payments direct to the lender on the employee’s behalf. The employee can use the vehicle for personal purposes.
A novated lease can, in the right circumstances, be a tax effective loan structure for an employee to purchase a vehicle. The percentage that the employee uses the vehicle for business purposes can be applied to the monthly loan repayment and that portion paid from the employee’s pre-tax income. The percentage of personal use of the vehicle can then be applied to the balance of the monthly loan repayment, and this can be paid from post-tax income. By structuring the loan payment in this way, it should not attract fringe benefits tax. In each circumstance however, we recommend seeking advice from your accountant.
Commercial finance comprises several different types of business loans, which you may need to manage business capital and cash flow. We’ve listed the different commercial loan types below.
Business Overdraft – your financial institution allows a business owner to overdraw existing business accounts up to an approved limit. The lender charges interest on the amount overdrawn. Businesses often use overdrafts as small loans and usually to cover cash flow gaps.
Line of Credit – a loan established between a business and a lender over a long-term period, wherein the business can access funds up to an approved limit. This loan offers accessibility and flexibility because the business may access the funds in their entirety or in part at any time. Interest is calculated only on funds drawn down and principal repayments are not required until the end of the term.
Term Loans – a loan between a business and a lender that is repaid in set amounts over a set period. This type of loan is perfect for businesses that prefer predictable payments.
Commercial Rate Loans – also called ‘business markets loans’, involve a business borrowing a single amount, which can be spread across several sub-accounts, and those sub-accounts may attract floating rates, fixed rates and cap rates. The business can use this type of loan to protect themselves against market linked rate movements.
Cash Flow Finance – Many businesses provide services to their clients upfront, invoice the client and then wait for payment, often up to 30 days. A lender who offers a business cash flow finance makes a payment to the business calculated on outstanding debtors which means the business can better manage cash flow gaps. There are two common cash flow finance methods used by businesses:
- Invoice discounting – a lender pays a business a percentage of the business’ unpaid debtor invoices, and the lender uses the debtors as security.
- Invoice factoring – the lender assumes responsibility of the business’s debt ledger and chases payment on its behalf.
If you are thinking of purchasing business equipment or assets, or need some advice regarding capital or cash flow finance management solutions, get in touch with one of our experienced mortgage brokers.