Many of our clients are tradespeople (tradies) who have their own businesses, employ a handful of employees and are owner-operators (working in their business). In the current economic environment, many are experiencing unprecedented growth in their businesses due to the induced ‘building boom’. It’s great news for them and even better news for the economy. As their businesses grow so do their need for tools, equipment and vehicles.
For some tradies it can be difficult getting finance to purchase new assets for their business, especially if their Accountant has used deductions which have reduced the taxable income. So here are a few tips to assist you, the next time you apply for finance to purchase business assets:
Engage a Broker
I would encourage you to engage the services of a finance broker. There are a few reasons why i suggest this. A Finance Broker will:
Help navigate the lenders policy and get the best deal for you. The lending landscape for the self-employed can be complex.
Pre-assess your financial position and the financial statements for your business, to ensure your income is enough to service the loan.
Find the best deal for your circumstances, by capturing your requirements and objectives, and providing a product recommendation.
Understand your business operations and convey this to the Lender.
Perform all the necessary checks upfront and present it to the Lender.
Meet you at your home or workplace to discuss your lending needs
Consider a low doc loan
It is common for Lenders to request the most recent financial years income tax returns by the 31st December. For example, the FY20 Income Tax Returns would be required after the 31st December 2020. This can prove difficult for some businesses, given they are not required to be lodged until May 17th following the end of the financial year. Many Accountants prefer to lodge the returns closer to the May deadline.
Low Doc Loans are a great option for the self-employed, allowing them to provide alternative documentation to prove their income – such as BAS statements or Bank statements. In some cases, no documentation is required at all. And they are generally offered at the same interest rates as full doc loans (loans using financial statements and income tax returns to verify income).
Read more on Low Doc loans here.
Apply for pre-approval
It is highly recommended you apply for pre-approval before you purchase. This will provide you with peace of mind. knowing that the Lender and the terms of the loan (repayments, interest rates etc) are agreed too before you commit to purchasing the vehicle or asset. It will save you time too, speeding up the process of taking possession of the business asset.
Get tax advice
Before purchasing a business asset, consult with your tax adviser or accountant. Purchasing the asset in the correct entity is an important factor when claiming the tax benefits. They will also ensure the loan structure is suitable for your business. The team at yesapproved.com.au will liaise with your tax advisers to ensure the loan is suitable.
Preserve your Capital*
As they say, Cash is King. In business life, Capital is King! Financing an asset on a Chattel Mortgage or Lease will help preserve your capital in the event you need capital for business growth, cash flow or repairs and maintenance of your business assets. With Commercial Loans interest rates starting from 3.00%; it could be a great consideration for your business*.
Residual or Balloon Values were common among the self-employed. They helped to reduce the loan repayments during the loan term but then a lump sum was payable at the end of the contract. In the last few years, 7-year loan terms have become more common. The repayments for a 7-year loan are similar to a 5 year loan with a Residual. This can be a benefit, because the issue of addressing the residual in 5 years is avoided if you decide to keep the car.
Consider the loan term
It is important to align the loan term to the expected period you will keep the vehicle. For example, you may purchase a new car and expect to keep it for 3 years. So, consider a 3 year loan term. If you opt for a loan term of 7 years, then there is potential for substantial payout penalties if you choose to sell the asset earlier and repay the loan.
Lodge & pay your BAS on time
Work can often get in the way of paperwork, and this is common among the self-employed. Paying and/or Lodging your BAS late can have unintended consequences when applying for finance. Some lenders request BAS statements and the Integrated Tax Account, as part of a low doc or full doc application. Any evidence of late payment may affect the outcome of your application.
Keep business accounts in good order
If your business accounts are maintained well and reflect no over limits/overdraws it will support your application. Lenders do not often request these if you have a strong profile however if they do, they need to be in good order. Regular overdrawn’s can reflect financial distress in your business.
Ensure you’re Insured
Insuring the asset is compulsory if it is secured against a business loan. If you have purchased a vehicle and had genuine or aftermarket accessories fitted, then insure these too. In the event of claim these may not be automatically covered unless you notify the insurer.
The team at yesapproved.com.au can help you with you all your queries before you purchase. We specialise in finance for tradies.
The information is intended to be of a general nature only. We do not accept any legal responsibility for any loss incurred as a result of reliance upon it – please make your own enquiries.
Any advice contained in this document has been prepared without taking into account your particular objectives, financial situation or needs. For that reason, before acting on the advice, you should consider the appropriateness of the advice having regard to your own objectives, financial situation and needs.
*discuss any tax related isues with your tax adviser/accountant before making any decisions