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Matt Walker

1300 858 152

matt@accounttech.com.au

Related posts:

1. The Finance Maze – Operating Leases
2. The Finance Maze – Chattel Mortgages

The finance scene has changed over the last ten years for the small to medium business owner since the introduction of GST.

Prior to the year 2000 the majority of business people would go out to purchase a vehicle or equipment for their business and finance it on a lease or a commercial hire purchase depending on their accountant’s advice and the business’ setup.

This made it quite simple for their accountants as all they had to do was add up the lease/HP payments for the financial year and that was the tax deduction.

Chattel Mortgage Finance

In the current market over 90% of business finance is done on a product called Chattel Mortgage.

The reasoning behind this is that the items being purchased, whether motor vehicles or plant and equipment, all attract GST on the sale. The client can fund the total amount of the item including GST from the financier and are then able to claim the GST component (input credit) back it their next BAS.  Businesses can claim the GST up front regardless of whether they are cash or accrual reporting.

This allows the business owner to make a capital purchase and offset the input credit against the GST payable.

The business will also be able to claim depreciation and interest on the viagra mortgage as under this facility the client owns the goods from day one and the financier takes a mortgage (security) over the chattel. This differs from a lease or hire purchase agreement where the financier actually owns the goods until the last payment is made.

Lease Finance

Some businesses do still lease their vehicles or plant and equipment depending on their individual circumstances and their accountant’s advice.

The benefit to businesses funding their capital purchases on lease are that the finance company owns the goods and claims the GST so the business purchases an item exclusive of GST and pays the GST on the lease repayment.

An example of this would be;

A motor vehicle is say $44,000 including GST before on road costs

The financier would fund $44,000 and pay the dealer and claim the $4,000 GST back.

The client would have a lease for $40,000 over 48 months with a residual value of 30%.

This would mean that the client pays a monthly lease rental of approx $860 (including $78 GST) for 4 years and at the end of the term the Residual value would be $12,000 plus GST.

Related posts:

1. The Finance Maze – Operating Leases
2. Good News for Aussie Business Owners
3. See what we can offer in 2010

Moving on from consumer finance to small business and corporate finance, we’ll look at the example of purchasing IT equipment.  Rental or operating lease facilities are often ideal for these groups as they need to be up to date with technology to keep pace with their competitors.

Rental Products

The rental products available in the market allow the small business to lease (off balance sheet) IT equipment which will no doubt be out of date in 2 to 3 years time. This product allows the business “the use” of the current IT equipment and at the end of the finance term they just hand it back and upgrade to a more current product.  A fixed monthly payment is calculated at the time of purchase.

The advantage of this type of lending is that the business can maintain cash reserves for normal trading cash flow rather than using their cash to purchase equipment outright which will be obsolete in a few years time.

Dollar Buy Back

Some financiers offer a $1 buyback at the end of the term which is ideal for items with a life span of more than 5 years; this allows the business to spread the cost over a period of time to ease cash flow.

Rental can be reasonably expensive due to the fact that the items are worth nothing at the end of the term.  This is because technology evolves and the financier ends up with an obsolete piece of equipment which they then have to dispose of.

Some of the lenders in this industry are quite switched on and are able to package together say a container full of refurbished second hand photo copiers and send them to third world countries. This also helps the retailers who are trying to sell new product and do not have to compete against their own refurbished product in the market.

Other Options

The other thing to consider in the current market is that it may be more beneficial to purchase the larger dollar amount items on a Chattel Mortgage and claim the Australian Governments Investment Allowance (in place until December 31, 2009).  Your accountant will be able to advise you if this is the best choice.

Related posts:

1. The Finance Maze – Chattel Mortgages
2. The Finance Maze – Consumers
3. The Finance Maze – Cash vs Finance

Buying a motor vehicle whether it is new or used can be a time consuming and frustrating adventure. In this article I will look at the everyday person buying a family car and some of the things to consider.

The act of purchasing a vehicle and funding it are two very separate parts of the process.  The negotiating of a price or change over figure is one transaction and the funding a totally different transaction.

Once you have completed the buying of the vehicle it then comes down to how is the most effective way to pay for it. Most from the old school would say that if you can’t pay cash then don’t buy it and to some this is still the way they buy things.

Now if you have the cash to pay for a vehicle outright  then this may not be the best option as you end up with no cash and a depreciating item.

There is a way that you can retain your cash and purchase the vehicle under finance and at the end of the day you are better off.

How Does This Work?

The following assumption is based on the fact that you can afford a monthly payment from your income.

Let’s look at the scenario that you wish to buy a new vehicle for say $30,000 and that you were going to pay cash. You pay the dealer the money and you end up with an asset worth $30,000 day one and no cash.

What do you think your car will be worth in 12 months and again in 5 years?

Let’s be unrealistic and say that your vehicle is worth $25,000 in 12 months and say $20,000 in 5 years and you still have no cash reserves.

This is how it works:

If you invest your $30,000 in the bank on a term deposit over 5 years with compound interest at 5.1% and you finance the $30,000 car purchase over 5 years at 9%.

At the end of the five years, your cash investments will be worth $38,471, and your outgoing repayments will have been $37,085.  This means you have an extra $1,386 in your pocket at this time.

Why Does This Work?

When looking at the interest rates in the above example, it may seem counter-logical that you end up with a positive cash position, given that you are receiving 5.1% on your funds and paying out 9%.

The simple answer to this is the power of compound interest.

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Related posts:

1. The Finance Maze – Operating Leases
2. The Finance Maze – Chattel Mortgages
3. The Finance Maze – Consumers

In today’s ever changing society the consumer, small business and corporate entities rely so heavily on finance as an everyday occurrence that many different products have become available.  ‘The Finance Maze” series will lead you through a number of different options available in the market from the small through to the large lending products.

Consumer Finance

The consumer uses finance for anything from buying a TV, car or boat through to the home they live in and there are many different ways to procure these items, some more expensive than others. Let’s have a look at each market segment to see where the advantages are.

Example:         purchase of a new Flat Screen TV for $3,000.

Mum and Dad go out to buy a new flat screen TV from a major retailer.  The best way to purchase this item would be with cash as they can potentially get a reduced price with the power of cash. Most large retailers offer a “rental” facility or “no deposit, no interest” facility.

Each of these options can be very expensive as you do not have the ability to get a discounted price using these funding methods. The reason you don’t get a discount is that the interest content in the “no interest” facility is included in the price of the item you are buying.

Option 1 – No Deposit, No Interest

If the purchase price of the new Flat Screen TV was $3,000 you maybe able to negotiate this down to say $2,200 by paying cash. If however you wish to take it over a 2 year period “no deposit and no interest” the price would stay around the $3,000. So you borrow the $3,000 over 2 years with 24 monthly payments of $125 ($3,000 divided by 24) however the interest rate on the above example equates to 31.75% based on a “cash purchase” price.

Option 2 – Rental

The other alternative is the “rental” option and this is also fraught with cost as you pay for the item over a couple of years and then find out that you do not own it at the end of the period and either have to hand it back or pay an amount to own it.

Either of these two options have the advantage that you have a set monthly payment which can be more affordable to most families however the pitfall is that the interest component can be in excess of 30%pa. Even most credit cards are half this annual rate and the other cheaper alternative maybe an unsecured personal loan.

The best idea is to check out all available options in the market for these consumer purchases and if you consider the terms acceptable then use the facilities available to you.

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Related posts:

1. The Finance Maze – Operating Leases
2. The Finance Maze – Chattel Mortgages
3. The Finance Maze – Cash vs Finance

These days it can be difficult to source business financing, with stricter guidelines and lending criteria from traditional financiers.  For many businesses experiencing cash flow, factoring may be an option to consider.

Just what is factoring?  It is the process of selling your receivables to a factor at a discount, and receiving cash for them timely rather than waiting for the normal customer payment cycle to complete.  The factor will then take over the collections and administration of these outstanding invoices.  It is not a loan, but a sale of a financial asset.

Factoring is ideal for fast growing companies who are squeezed for cash, or for businesses who invoice goods and services on credit terms.  It is not suitable for businesses who issue progress claims (such as building contractors), retailers or professional services.

There are three main differences between factoring as a source of finance, and bank loans.  Firstly, the emphasis is on the value of your receivables on your balance sheet rather than the value or credit worthiness of your business.  Secondly, it is a sale of a financial asset rather than a loan, and finally, there are three parties to the factoring arrangement (your business, your customer, the factor) rather than two (you and your bank).

Invoice discounting is a form of factoring for businesses who need to access the money tied up in their receivables, but still want to maintain and manage their own ledger.  Your customers will not be aware that you have sold their invoices.  For businesses who lack the expertise or resources to manage their debtors ledger, or are undergoing rapid growth, this is a suitable option.

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Related posts:

1. Where’s My Money?
2. The Finance Maze – Chattel Mortgages