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Three finance options for SMEs: What’s the difference?

December 2, 2019

An introduction to Finance Leases, Specific Security Agreements and Hire Purchase for SMEs

Finding the most appropriate method of financing for both ongoing operations and future growth, is just one of the challenges facing SMEs.

We’re here to help you understand the difference between three common types of financing, so you can make an informed decision about what is best for your business:

Option1: Finance Lease

In this case, your finance provider buys the asset (e.g. machinery, car, computer) and leases it back to you over a fixed term. At the end of the lease, you decide between paying an agreed residual value to purchase the asset outright, or return it to the finance provider.

  • Benefits
  • Frees up working capital
  • No deposit
  • Asset provides security
  • Choice of lease terms
  • Tax deductible fixed monthly payments
  • Drawbacks
  • You don’t own the asset upfront
  • You’re responsible for servicing and repairs
  • You can only claim GST input tax credit on each lease payment, not in total at the beginning of the lease
  • Asset could be repossessed if you fall behind with payments
  • Best suited for business owners with limited spare cash
  • Fast-growing businesses who need to maximise working capital
  • Car fleet leasing if you do not want to own the vehicles

Option 2: Specific Security Agreement

With this option, you buy your business equipment using a fixed interest loan and the lender takes a charge over the asset.

  • Benefits
  • Frees up working capital
  • You own the asset from day one
  • Asset provides security
  • Choice of loan terms
  • Fixed monthly payments
  • Possible GST refund upfront (no GST on monthly payments)
  • Option for upfront deposit and/or higher residual payment
  • Asset depreciation and interest portion of loan payments usually tax deductible
  • Drawbacks
  • Business owns the asset and must bear insurance cost
  • Asset could be repossessed if you fall behind with payments
  • Best suited for business owners with limited spare cash
  • Claiming upfront GST credit

Option 3: Hire Purchase

In this case, the assets you need will be purchased by your finance provider and rented back to you for a fixed period. The business automatically owns the asset when the final payment is made.

  • Benefits
  • Frees up working capital
  • No deposit
  • Asset provides security
  • GST can be included in financed amount
  • Possible GST refund upfront, no GST on monthly payments
  • Choice of lease terms
  • Choice of equal monthly payments, or seasonal variable payments
  • Option for high residual payment which could be refinanced instead of taking possession of asset
  • For complex machinery, option to pay interest-only during installation period
  • Asset depreciation and interest portion of loan payments are usually tax deductible
  • Drawbacks
  • Business does not own the asset until final payment is made
  • Can be more expensive than other financing arrangements
  • Asset could be repossessed if you fall behind with payments
  • Best suited for business owners with limited spare cash
  • Claiming upfront GST credit

Talk to your financial advisor

We recommend you discuss the tax implications with your financial advisor, since our comments about tax are general and may not apply to your circumstances.