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