expert advice: Phil Chaplin | CEO | CFI Finance Group
UNPACKING YOUR FRANCHISE FINANCE OPTIONS Whether you’re starting a new franchise or you’re already in business, the myriad of finance options available can be confusing and it’s often difficult to know which finance product will suit your business best. In this article we’ll talk about some of the different financing options available and how they can be applied to some of the scenarios that businesses face every day. First though a disclaimer, this information is intended to be general in nature and it’s always best to seek professional advice tailored to your specific circumstances. Great, now we’ve got that out of the way let’s look at some of the different finance products available…
Business Loans A business loan can be one of the most flexible forms of finance available to a small business. Funds can be borrowed to start a new business or to buy an existing one (or for some other use within the business).
With a business loan there are usually fewer limitations on how the borrowed money can be used, and the business itself (or all of the business assets) are the primary security for the loan. If what you’re seeking is the broadest possible use of funds, including being able to finance things like fitout costs, or elements of goodwill as well as tangible assets in a business purchase, then a business loan might the product for you.
Operating Lease (Rental) Under an operating lease you pay for the use of the equipment on either a fixed or flexible term, ranging from a few months to years. In general lease payments will be higher for shorter terms or whether there is more flexibility in the lease (like being able to hand equipment back early). Even with longer fixed terms you can still retain a lot of flexibility with an Operating Lease, with options to purchase, return or keep renting equipment all common at the end of the lease term. Lease payments may be treated as an operating expense and can be tax deductible. You don’t get to claim depreciation but you
So, whilst your finance “ provider might recommend (or approve you for) a particular product, it’s also quite possible that you can change or mix and match finance products if you need to.
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don’t have to worry about disposal of the asset either, and you will likely have more flexibility to upgrade or return equipment if your needs change over time. GST is payable (and able to be claimed back) on the lease payments. Whilst some operating leases do include things like maintenance, this can vary, if you take out a lease with a bank or finance company you will probably be responsible keeping the equipment in good working order through the lease term. If you’re looking to finance specific identifiable assets and you’d like to keep your options open to buy or return the goods at the end of the term (rather than trying to guess your plans years into the future) then an operating lease might be the product for you.
Chattel Mortgage (Equipment Loan) A chattel mortgage is still the most common term used for a loan secured by a specific piece or pieces of equipment, this could be a car or truck but could be just about anything at all really. ‘Secured by’ in simple terms means the equipment can be repossessed and sold if you default on the finance contract. With a chattel mortgage (sometimes called an equipment loan or secured loan), you own the equipment from day one. This means you can claim depreciation on the equipment (in accordance with ATO guidelines) and you can also claim back the GST included in the purchase price. There is no GST payable on loan repayments. 50 business franchise MAGAZINE
