Types of Asset Financing
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Equipment Finance Loan / Chattel Mortgage
An equipment finance loan, or chattel mortgage, is a popular choice for businesses looking to acquire machinery or technology without tying up significant capital. This type of financing allows you to take out a loan specifically for the purpose of purchasing equipment, generally secured by the equipment itself. Your business just needs to have sufficient cashflow to meet the loan repayments, and at the end of the loan term you will own the equipment.
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Leasing
Leasing is another common method for acquiring assets. In this arrangement, you pay to use the asset over a specified period without owning it. Leasing allows for flexibility, and is often used for assets that quickly become obsolete, where you can simply hand them back at the end of the term. Lease payments are tax deductible.
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Hire Purchase
This is a hybrid of the above options, where you lease the asset and make payments for a specified term, often with a larger balloon payment due at the end of the term. Legal ownership is transferred to you once the final repayment is made. From a tax perspective, it’s similar to a loan i.e. the interest component of the repayments is tax deductible, and you can claim depreciation on the asset itself.
Key Considerations for Asset Purchases
When deciding how to fund your asset purchase, consider the following factors:
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Interest Rates
Interest rates play a crucial role in determining the overall cost of your financing, so it’s essential to compare rates across different lenders. Banks will often offer lower rates compared to dealerships, but always make sure you read the fine print and understand what rate you are actually being charged.
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Fees and Charges
A lower interest rates may seem enticing, but you should also consider various fees associated with the financing. These might include establishment fees, service fees, and early repayment charges. Understanding the full cost of financing will help you avoid surprises later.
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Loan Duration
The length of your financing agreement can significantly impact your total repayments. A longer loan term generally results in lower monthly payments, but it also means you’ll pay more in interest over time.
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Repayment Frequency
The repayment schedule can be tailored to your preferences – weekly, fortnightly, or monthly. More frequent payments may reduce the overall interest paid, but consider the nature of your business’ cashflow when deciding on your repayment frequency.
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Balloon Payment
Some financing agreements allow for a balloon payment at the end of the term. This option reduces your monthly repayments during the loan period but requires a lump sum payment when the loan matures. Assessing your cash flow is essential when considering this option.
Conclusion
With a variety of financing options available, it’s crucial to assess your individual circumstances and goals before making a decision.
Are you looking to equip your business with new machinery or vehicles? Do you need assistance with understanding the tax implications of your asset purchases and financing arrangements? Our team at BLG is here to help. We offer expert guidance to help you make informed financial decisions, so please talk with us today.
Whatever you decide we wish you and your business every success!