Buying a major business asset can be a significant decision. Whether it’s a vehicle for a growing team, machinery for a new contract or equipment needed to keep operations moving, the question isn’t always simply what should we buy? It can also be how should we pay for it?
This is where asset finance comes into the picture.
For many Australian businesses, financing an asset can provide an alternative to paying the entire purchase price from available business funds. But asset finance isn’t one single product. There are different ways to structure the finance, and the most appropriate approach depends on the asset, the business and its financial circumstances.
So, what is asset finance and how does asset finance work? Let’s break it down.
Asset finance in simple terms
At its simplest, asset finance is a way of funding a business asset over time rather than paying the entire cost upfront.
The asset might be something tangible that the business needs to operate, such as a truck, excavator, commercial vehicle or piece of manufacturing equipment.
Instead of using a large amount of available capital for the purchase, the business enters into a finance arrangement and makes payments according to agreed terms.
Think of it as separating the use of the asset from the timing of the payment.
The business gets access to the asset it needs while managing the purchase through a structured finance arrangement.
Why do businesses use asset finance?
Businesses may consider asset finance when they need to acquire an asset but want to manage how much capital is committed upfront.
For example, a construction business may need a new excavator to take on additional projects. A trades business may need another work vehicle, while a manufacturer may need new machinery to increase production capacity.
Rather than paying the full purchase price from available cash, the business can explore whether financing the asset is appropriate for its circumstances.
The objective isn’t simply to obtain finance. It’s to find a structure that fits the asset, business and broader financial position.
Why would a business finance an asset?
The answer is different for every business.
Consider a landscaping company that has secured several new contracts but needs another commercial vehicle and specialist equipment to service them.
The business could potentially pay for everything upfront. But doing so would reduce the amount of cash available for wages, materials, fuel, marketing and other operating costs.
Financing the assets could provide another way to approach the purchase. This doesn’t mean financing is always better than paying cash. It simply gives the business another option to consider.
Common reasons businesses explore asset finance
A business might consider financing when it wants to:
- Replace an ageing asset
- Upgrade outdated equipment
- Expand its vehicle fleet
- Increase production capacity
- Take on a new contract
- Enter a new market
- Improve operational efficiency
- Preserve available working capital
The important question is not simply whether an asset can be financed, but whether the proposed finance makes sense for the business.
What happens when you finance an asset?
The easiest way to understand the process is to follow a hypothetical example.
Imagine a Sydney construction business needs a $120,000 piece of machinery.
Rather than paying $120,000 from its available funds, the business could explore finance for the purchase.
The lender assesses the application, including the business and the proposed asset. If approved, the business enters into the agreed finance arrangement and makes repayments over the selected term.
The business can then use the machinery as part of its operations while meeting its finance obligations.
The exact ownership and repayment arrangements depend on the type of finance used. This is why how asset finance works can look different from one business to another.
The three questions to ask before financing an asset
Rather than starting with the question “Which loan should I choose?”, businesses can start with three more useful questions.
1. What does the asset need to achieve?
An asset should have a clear purpose. Is it replacing something that is no longer reliable? Will it allow the business to take on more work? Does it reduce manual processes or improve productivity?
Understanding the reason for the purchase helps put the cost into context.
2. What can the business comfortably afford?
The purchase price isn’t the only number to consider. A business should look at its existing commitments, expected income, operating costs and proposed repayments.
An asset may be valuable to the business but still need to be financed in a way that fits its cash flow.
3. How long will the asset remain useful?
The expected working life of the asset can also matter. Financing a short-lived asset over a long period may create a different financial position from financing an asset expected to remain productive for many years.
The finance term and asset’s useful life should therefore be considered together.
What does asset finance actually cover?
The term can sound broader than it sometimes appears. In practice, businesses may explore finance for many different types of assets, including:
Vehicles
Cars, utes, vans, trucks, trailers and other commercial vehicles.
Heavy equipment
Excavators, loaders, agricultural machinery and other specialised equipment.
Production assets
Manufacturing machinery and equipment used in production.
Trade equipment
Tools, workshop equipment and specialist assets required by contractors and trades businesses.
Technology
Certain business technology and equipment may also be eligible, depending on the lender and finance structure.
The important factor is that not every asset qualifies under every finance product. Lender policies can differ.
Is asset finance the same as a business loan?
Not necessarily. A general business loan can provide funds that a business may use for various purposes, subject to the terms of the facility.
Asset finance is generally connected to the acquisition of a particular eligible asset. That distinction can matter when comparing finance options.
For example, a business that needs $80,000 for a specific piece of machinery may want to explore asset finance alongside other forms of business funding.
The right option depends on what the business is trying to achieve and how the funding will be used.
What happens to the asset during the finance term?
This depends on the finance structure. Some arrangements involve the business purchasing and owning the asset while the lender holds a security interest over it. Other structures involve the financier retaining ownership while the business uses the asset under an agreed arrangement.
This is one reason businesses should look beyond the interest rate when comparing finance.
The structure can affect:
- Ownership
- Repayments
- Security
- End-of-term arrangements
- Potential fees
- Tax treatment
The product name alone doesn’t tell the whole story.
Can asset finance be used for a second-hand asset?
It can be, depending on the lender and the asset. A business doesn’t necessarily have to purchase brand-new equipment to explore asset finance.
Used machinery, vehicles and equipment may be considered, although lenders can look at factors such as:
- The asset’s age
- Condition
- Value
- Type
- Intended business use
Older assets may have different lending requirements, so businesses should understand their options before committing to a purchase.
What about the tax side?
Finance and tax are related considerations, but they aren’t the same thing. Businesses may need to consider GST, depreciation and other tax treatment when purchasing an asset. The outcome can depend on the asset, finance structure, business use and individual circumstances.
There may also be tax measures such as the Instant Asset Write-Off that could be relevant to eligible businesses and assets, subject to the rules applying at the time.
Because tax rules can change, your accountant or registered tax adviser should confirm how the purchase and finance arrangement applies to your business.
Is asset finance right for your business?
Asset finance can be a practical way for Australian businesses to acquire vehicles, machinery and equipment without necessarily paying the entire purchase price upfront.
But the value of asset finance isn’t simply in spreading a payment. The bigger question is whether the asset, finance structure and repayment commitment work together.
Before applying, consider what the asset will contribute to the business, what the finance will cost over its term and how the repayments fit into your wider financial position.
For businesses unsure where to start, an asset finance broker can help explain the available structures and lender requirements.
FAQs
What is asset finance?
Asset finance is a form of finance used by businesses to acquire eligible assets while paying for them over an agreed period rather than necessarily paying the full purchase price upfront.
How does asset finance work?
A business identifies an asset, determines its funding requirements and explores suitable finance arrangements. If approved, the business uses or acquires the asset under the agreed structure while making repayments according to the finance terms.
What can asset finance be used for?
It can potentially be used for eligible business vehicles, machinery, equipment and other assets. The assets accepted vary between lenders and finance products.
Can small businesses use asset finance?
Yes. Small businesses can explore asset finance, although lender requirements and eligibility criteria vary.
Can startups get asset finance?
Some newer businesses may be able to obtain asset finance. Lenders can consider factors including business and industry experience, financial position and the proposed asset.
Can I finance a used vehicle?
Depending on the lender and vehicle, used vehicles may be eligible for finance. Age, condition, value and intended use can affect the available options.
Is asset finance better than paying cash?
Not necessarily. Financing can preserve available capital, but it also creates repayments and finance costs. The appropriate choice depends on the business’s cash position and circumstances.
Does asset finance affect cash flow?
Yes. Financing spreads the purchase cost but creates an ongoing repayment commitment. Businesses should consider repayments alongside their existing and expected cash flow.
Does asset finance require a deposit?
It depends on the lender, asset and finance structure. Some arrangements may require an upfront contribution, while others can have different funding requirements.
Is asset finance tax deductible?
The tax treatment depends on the asset, finance structure, business use and individual circumstances. An accountant or tax adviser can provide advice specific to your business.
Conclusion
An asset can be an investment in your business, but the way you fund that investment can influence your cash flow and financial commitments for years to come.
That’s why understanding what asset finance is and how it works is only the starting point. The next step is considering which structure, lender and repayment arrangement make sense for the particular asset and business.
MorFin Group takes an education-first approach to finance, helping Australian businesses understand their options and make informed decisions based on their individual circumstances.