Many business owners use the leasing services of banks, finance brokers and accountants when purchasing items for their business, which might be a car, tractor or even a piece of art. Rather than buying the business item with their own capital, they lease the item instead.
Leasing, also known as equipment finance, solves the problem that many growing businesses face – how to meet burgeoning expenses with limited funds. Basically, the way it works is that the business item purchased is used as collateral for a loan, which is then paid off in instalments. Depending upon the item purchased and the type of facility utilised, the business owner may or may not own the item at the end of the term.
While leasing used to be predominantly offered by the major financial institutions, today finance brokers, accountants and even financial planners are setting up leasing arrangements for clients.
If you are a business owner shopping for a competitive leasing deal do not compare products on headline interest rates alone. This is an easy trap to fall into since most of us use this method of comparison when shopping for other forms of lending such as a mortgage or investment loan. However comparing leasing products offered by different providers based on headline interest rates could bring you unstuck – because although the rate might be competitive, the monthly repayments may not be.
An uninformed shopper might choose the lease offering the lowest rate, but if the commission (paid to the broker or financial adviser) is built into the repayments, the interest rate charged will not reflect this. Therefore, the best method of comparison is the dollar value that you are charged each month – and arming yourself with this nugget of advice should certainly assist you when negotiating a better deal (remember to always compare like products with like).
The five major leasing products are commercial hire purchase, chattel mortgage, operating lease, finance lease and novated lease. Basically all of these facilities, with the exception of an operating lease, enable you to own or purchase the item at the end of the term, generally by paying a residual.
Most lenders restrict equipment finance to the self-employed, so salaried employees probably won’t need to concern themselves with the commissions charged on the various leasing products. Although it’s possible for a person to lease a car for personal purposes, there are no tax advantages for doing so. Business owners, however, may claim GST on the purchase price of the business item and, depending upon the type of loan utilised, the GST on the lease repayments. Matters of tax, however, should be placed in the hands of an accountant.