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…
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.
With a 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 Equipment 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 usually get to claim depreciation but you 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 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 Equipment 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.
If you’re looking to own the equipment from the outset and your business is able to make use of the GST and depreciation benefits then a chattel mortgage could be just what you’re looking for.
Making the most of these products
Mix / Match – It’s worth pointing out that as circumstances change your choice of finance product may change too; the product that suits one piece of equipment in your business may not necessarily suit another. 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.
New or Used – Many financiers will allow provide leases and loans for used equipment, so long as that equipment is of good quality and has enough life left in it when considered against the finance term you want. It’s common for banks to be a little tougher when it comes to terms or the amounts they’ll lend against used equipment but this is where alternative lenders can really shine.
Am I too late? – It’s quite common for businesses to use up precious capital purchasing assets and then realise they’re stretched for cash or could better use their money on business growth. Fortunately this is an easy probably to solve. Generally, you can take out a chattel mortgage against goods you already own, or enter into what’s called a sale-and-leaseback transaction if you want to lease your equipment. There may be some additional hoops to jump through if you’ve owned the goods for a long time, so it’s usually easier to get it right from the outset.
Buying a Business – Whilst a business loan is often the most natural fit when you’re buying a business it’s not the only option. Many financiers can still help you to fund the acquisition by offering a chattel mortgage or sale-and-leaseback against the tangible assets of the business you’re buying.
If all of this wasn’t confusing enough there are yet more finance products available; Finance Leases (often thought of as lease to own) and Unsecured Loans to name just a couple (and it’s common for banks and finance companies to use different terms for all these products). But it’s important not to let the terms confuse you, the key takeout is this…
There’s a finance product for almost every scenario, and the better financiers can provide you with options and tailor their products to meet your business needs. Owning or expanding your franchise business could be much closer than you think with a little bit of help, the right product, and the right advice.
Any advice provided by CFI is general in nature and does not take into account your specific requirements or circumstances. CFI recommends obtaining professional legal and financial advice before undertaking any material business transaction, including obtaining finance.