What is asset financing?

Chattel mortgage (commercial loan)

• In this case, the asset that’s purchased is collateral for the loan.
• This loan type is specifically for vehicles or factory machinery.
• The lender may seize the asset if you’re unable to make repayments.

Hire purchase

• You may choose to hire a product from an external provider who purchases this asset and agrees to lease it to your business.
• You would be required to make ongoing payments to the provider during the lease period for the use of the asset.
• A benefit of hire purchase is that in many cases, your business can take ownership of the asset at the end of the lease period. It’s a flexible option that can help minimise cash flow issues.

Finance lease

• This is similar to a hire purchase.
• While you as the business owner would have control over the asset, you would also share some of the economic risks and returns from any change in valuation of the asset.
• The other difference is that you would not own the asset after the leasing period is over.

Operating lease

• If you only need an asset for a specific short-term or one-off project, then you may choose an operating lease.
• This type of lease offers you flexibility as the cost is based only on the asset’s value over the time the business has agreed to use it.

Novated lease (also known as salary packaging/salary sacrificing)

• This is a three-way agreement between an employee, employer, and finance provider.
• For example, an employer leases a car for their employee under the employee’s name.
• The employee pays the lease with their salary which reduces their taxable income and can lower their income tax.
• The payment is a once-off which includes the lease amount and other costs including insurance, petrol, and maintenance.

Asset finance type

Pros

Cons

Chattel mortgage

• Typically works alongside other loan types
• Less documentation
• The asset is yours from the beginning
• Don’t need to provide additional security as collateral
• Potential tax benefits

• Lack of flexibility – if you want to upgrade or get rid of your equipment, you’ll need to pay off your existing loan first.
• You’re entirely responsible for all asset costs.

Hire purchase

• Your repayments are tax deductible
• Offers greater flexibility with longer term repayments
• The interest rate can be fixed which provides predictability and stability.

• These loans are strictly secured against your asset.
• You don’t own the equipment until the final repayment.
• It could be expensive with higher interest rates and long term financing.

Finance lease/Lease agreement

• Lower upfront costs – you typically don’t have to make a down payment/deposit.
• They’re typically tax deductible.
• Easier to get than a traditional business loan.
• You can upgrade equipment if you need to.
• Maintenance costs and insurance is typically the provider’s responsibility.

• The lifetime cost typically ends up being higher than a once-off, upfront payment.
• You won’t own the equipment at the end of the lease.
• You may have to fulfil a minimum lease period with certain providers.

Operating lease

• Ideal for short-term projects.
• You can typically cancel an operating lease at any time without penalty.

• You must return the equipment at the end of the lease period.

Novated lease (business car lease)

• It’s easy to upgrade the vehicle every 2-5 years (i.e: per lease period).
• You typically don’t need to provide capital upfront.
• Improve business cash flow.
• You’re not tied down to a depreciating asset.
• Great for businesses that require a fleet of cars.

• Your business will not own the vehicle.
• After adding up monthly repayment fees and charges, it may cost the same as getting a personal car loan.
• You may not be able to alter the vehicle.