Growing your business means having the right access to a wide range of commercial financing solutions. At Borg Financial, we work with a number of different companies to provide commercial asset finance services for equipment and vehicle asset acquisitions big and small. Here’s a look at the four main types of commercial asset finance services that we offer along with their associated pros and cons.

Chattel Mortgage, is this right for me?

If you are looking to add a major piece of equipment to your business, then you will be interested in what is known as a chattel mortgage service. With a Chattel Mortgage, you can purchase a major piece of movable machinery that is unlikely to become obsolete during the life of the loan.

With chattel mortgages, you can secure either a monthly or quarterly payment plan that works within your cash flow situation. You can also structure a payment plan that allows you to make equal payments over the life of the loan or allows you to start off with smaller payments at the beginning of the mortgage.

An example of a chattel mortgage

Let’s say that you own a construction company, and you need to purchase a new earth mover. You can secure the purchase of the earthmover with a chattel mortgage and make equal quarterly payments over a seven-year period.

Pros of chattel mortgages

The asset becomes your legal property upon purchase. Once you are finished with the mortgage, you will be able to resell it or continue to use the assets for your business.
Payments on the assets are tax-deductible.
You can structure the mortgage to suit your company’s cash flow.

Cons of chattel mortgages

You will not be able to sell the assets while you are still making payments on it.
While you are paying off the assets, you will have to report it as a loan obligation. This could lower your ability to take our further loans.
If you want to sell the assets while you still have a mortgage on it, then you will potentially have to pay an early termination fee.

Hire Purchase, what is it?

Perhaps you want to acquire a major asset for your business, but you can’t secure the purchase on your own. This is where a hire purchase can assist you. Similar to an operating lease, a hire purchase will allow you to finance the hire and purchase of new equipment. However, it is structured as a “three-party” purchase that will involve the purchaser, the financier, and the seller. In this arrangement, the financier will purchase the asset from the seller and then finance the purchase for the buyer.

As a hire purchaser, you will place a down payment on the assets and then make instalment payments. These are usually structured as monthly payments. At the end of the instalment payment plan, you may or may not have to make a balloon payment depending on the structure of the instalment plan and the lender specifically.

When you have made your final payment, you become the legal owner of the asset. Before the final payment is made, the financier is considered the legal owner.

An example of hire purchases

Let’s say that you own a warehouse, and you need to purchase three forklifts. However, you do not have the money to purchase the forklifts outright. You can enter into a hire purchase agreement with a financier. The financier will purchase the forklifts and sell them to you on a seven-year instalment plan with a 10% down payment. You can now use the forklifts for your business while you pay off the purchase price with the financier.

Pros of a hire purchase

You can create a payment plan that suits your company’s cash flow. That means that you can usually work with the finance to make monthly or quarterly payment plans.
You can claim depreciation on your taxes as the hire purchaser.
You own the assets after the final payment is made.

Cons of a hire purchase

The equipment may become obsolete at the end of the purchase plan.
You will usually have to make a down payment in order to secure the asset.
While you do not own the asset, you will be responsible for the maintenance.

What is a Commercial Lease?

Let’s say that you don’t want to purchase an asset for your business. In this case, you have the option to lease the asset, also known as lease and asset finance. With a lease, the financer will purchase the asset and transfer it to you for use in your business.

During the lease, you will make payments that will usually last the life of the asset’s usefulness. The lessor will usually be able to recoup the entire purchase price of the asset during the life of the lease.

At the end of the lease, you will have several options:

You can return the asset to the lessor.
You can make an offer to purchase the asset.
You can lease the asset again at a greatly reduced rate

An example of a lease

You operate a roofing panel manufacturing company, and you need to acquire a sheet metal stamping machine. You decide to lease the machine for a lease period of 10 years. To secure the lease, you agree to make quarterly payments over the next 10 years. At the end of the lease, you decide to make an offer to purchase the machinery. The lessor agrees to the purchase and your company now owns the asset outright.

Pros of leasing

You don’t have to make a down payment.
You can spread out payments throughout the life of the asset.
Normally all maintenance and running costs associated with the asset are covered under the lease payment.
You have the option to return, purchase or continue to lease the asset.

Cons of leasing an asset

You are stuck with the asset until the end of the lease. If you decide that you need to upgrade the asset, then you will have to pay a substantial early termination fee.
You will have to record the transaction as a financial lease obligation on your balance sheet.
Lease payments that include the maintenance and running costs can be slightly more than owning outright and paying running costs as a lump sum if calculated on an annual period.

Overdraft or business line of credit facility

Perhaps you don’t have a specific need for an asset. However, you need to make sure that you have the funds to secure what you need for your business. In this case, you will want to consider a business overdraft or business line of credit. An overdraft is simply a line of credit that is supplied by a bank.

With an overdraft, your business will have access to funds up to a certain limit. Your company will be able to draw funds from the overdraft as long as your credit limit is not exceeded. The company can then pay back the overdraft, with interest, over a non-specified period of time or maintain interest-only repayments.

An example of an overdraft

Let’s say that you have $100,000 AUD due from a customer in three weeks. However, you have payroll and invoice obligations in the amount of $55,000 AUD due in two weeks. You can draw $55,000 AUD to cover your company’s short-term obligations and then pay back the overdraft when your customer’s $100,000 AUD payment arrives. Interim cashflow lending can be a loan type we can use here however overdrafts can be cheaper for this interim funding.

Pros of an overdraft

There is no set term for the overdraft.
Allows you the flexibility to spend the funds as you need them for your business.
Helps cover short-term cash flow needs.

Cons of an overdraft

Interest rates are usually high.
There are significant fees if you go over the overdraft limit.
You can still pay a fee if you don’t use the line of credit.

Borg Financial provides top commercial asset finance services in Australia

At Borg Financial, we can help you find the commercial asset finance solution that is right for your business. We have outstanding relationships with top banks and lending facilities that offer you more choices and flexibility. Please do not hesitate to contact us to have a private confidential conversation.

Equipment Finance and Commercial Asset Finance Loans – What’s Right For You?