Forms of Finance

There are several sources of finance for a franchise available in different formats:

• Loan account, which is an account, opened for a customer by a bank, following the granting of a loan. The amount of the loan is credited to the customers current account and similarly debited to the loan account. An arrangement is subsequently made for the customer to repay the loan, usually over a stated period of time, with interest additionally being paid on the outstanding amount.


Loan accounts are often used for the purchase of assets e.g. property where the loan will run for a longer period or a vehicle purchase where the term of the loan will be much shorter to reflect the rapid depreciation of the asset. Fixed interest rates are often available.


• Bank and specialist financiers can also provide funds to a company in return for the company assigning, effectively selling, to it the invoices that the company has raised and will raise in the future. This form of finance is called Invoice finance, which involves raising finance using your debtor book. The advantage of this is that cash flow is directly linked to business expansion. This method is not suitable for all businesses and your bank will be able to advise you. It is important you note that:


- Normally, all of the company’s invoices will be sold to the financier;


- The financier will require the company to use an online system to notify all invoices that are raised as they are raised;


- The financier may operate a “recourse” facility where it can reclaim unpaid invoices from the company. Also availability of funds will be reduced if it transpires that invoices are not collectable;


- The financier will usually take a charge over all of the company’s business and assets and this will entitle the financier to appoint an administrator or receiver over the company if the company defaults upon its agreement with the financier;

- The financier’s charges for providing this facility can be higher than for other types of lending;


- Some types of business would not be suitable for invoice discounting or factoring e.g. those that receive payment from customers on delivery and those in the construction industry (although some specialist financiers will provide finance).


- Invoices can only be sold once and only those invoices that the company is contractually entitled to raise for payment by its customers, in accordance with terms of trading, can be assigned to the financier. To do otherwise is likely to be considered to be a fraud on the financier.


• Another method of finance to consider is asset finance. to fund the purchase of equipment for the business. This can help ease cash flow by spreading repayments over a period of time instead of making a one off investment.


Choosing the right type of asset finance can help save you time and money to invest in growing your business. You can also reduce the risk of owning obsolete equipment and there can be various tax outcomes too. When considering asset finance options, ask yourself:


- How much capital do I need to grow my business?
- When do I need to smooth the bumps in my cash flow?
- What are the tax outcomes of asset financing?
- How long will I need the equipment and will I need to upgrade it?
- Is technology rapidly changing in my industry?
- Do I want to 'finance to own' or 'finance to return' my asset?


Generally speaking, asset finance options include: Commercial Hire Purchases; Financial and Operating Leases; Chattel Mortgages; Novated Leases; and Technology Rentals. Each is suited to different commercial circumstances, so when considering your options, you may want to talk to your accountant or tax advisor. Below is an introduction to these main types of asset finance.


- Commercial Hire Purchase – CHP: Under this type of finance, you hire and use the asset from a finance company or a bank until the last payment. When you make the final installment, the ownership of the asset is transferred to you. You can tailor payment options, including the loan period, a deposit and a larger final residual (balloon) value payment. To help manage your cash flow, structured payments can be established according to your cash flow.


- Chattel Mortgage: Chattel Mortgages are a popular finance solution where you own the asset from the outset and your loan agreement is secured by the asset. You can tailor your loan payments by choosing the term – typically up to five years. Other payment options can include a deposit and a larger final installment. You can also structure payments to free up cash flow at the times of year you need it most.


- Finance Lease: With a Finance Lease, the financier owns the asset however you bear the risk of disposal (of the asset) at the end of lease. This type of lease can benefit businesses that need the latest vehicles or equipment without tying up a large amount of capital. You can choose lease payments in advance or arrears and terms up to five years. A residual value is required in line with the asset’s use and the Australian Taxation Office’s guidelines.

- Novated Lease: If you want to include a vehicle in your salary package, a Novated Lease can help. The financier owns the asset, while you and your employer sign a novation agreement to share the responsibilities of the loan. Typically loan terms are from 12 to 60 months. Monthly lease payments and a final residual payment are based on your circumstances and guidelines set by the Australian Taxation Office. If you are interested in a Novated Lease, talk to your HR department for options.


- Operating Leases: Operating Leases can often be used to fund a number of different assets. Payments towards this type of finance can sometimes be considered operating costs and will not appear as a liability on your balance sheet.

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