What is asset finance?

Asset finance is a way for a business to access new, or used, vehicles and equipment without having to pay upfront. By spreading out payments over a period of time, it can help manage cash flow. It typically involves paying a fixed monthly repayment for the term of a loan in return for use of the asset.

The loan is secured to the financed equipment, freeing up the equity in your other assets such as real estate. It’s also possible to structure a residual or balloon payment at the end of the loan, which lowers the normal repayments - you may need to pay more interest over the term though.

Types of asset finance

  • Equipment loan: An equipment loan (or chattel mortgage) may suit businesses that want to own vehicles or equipment up front . After successfully applying for funding, you buy and own the asset. Technically, you have a mortgage with the provider and the asset is security for the loan.
  • Hire purchase: Hire purchase gives you immediate use of a vehicle or equipment while paying it off over a fixed term. You apply for funding with a lender then they buy and own the asset, so you can use the asset while paying for it—and after your last payment you own the asset outright. If you’re unable to make the repayments the lender may take the asset ‘back’.
  • Finance lease: A finance lease can suit business owners who want to use a vehicle or equipment without owning it. You apply for funding with a lender then they buy and own the asset, while you lease the asset from the lender over a set period.

Tax implications of asset finance

Different asset finance arrangements may deliver different tax implications.

  • Equipment loans (chattel mortgage) and hire purchases: Deductions for depreciation, interest and running costs may be available. An instant asset write-off deduction may be available, if certain eligibility requirements are met.You may also be entitled to claim GST input tax credits upfront.
  • Finance and operating leases: Rental payments may be tax deductible, depending on your business circumstances. You may also be entitled to claim GST input tax credits in your Business Activity Statement (BAS) for the GST component that’s included in each rental payment.

Get asset finance advice

Before you choose and agree to any asset finance arrangement, make sure you understand your entitlements and obligations. To help you make a decision, you should:

  • Speak to your tax accountant or financial adviser to find out about the tax implications
  • Ask questions about what’s included in the agreement and clarify any wording you don’t understand
  • Calculate the total cost involved, like the upfront deposit, application and document fees, as well as the monthly repayment amount, account fees and the term of the loan