Frequently Asked Questions | Pure Capital Finance
Understanding your options regarding balloon payments or about an Operating Lease vs Chattel Mortgage. We answer some of your questions here.
What is a Chattel Mortgage?
Simply put it is a mortgage on a movable item such as a commercial vehicles and machinery.
A chattel mortgage is where you take legal ownership of the chattel (movable item) and the lender secures the loan by putting a mortgage on the chattel.
Other benefits to taking out a chattel mortgage is lower interest rates, flexible loan terms, adding insurance and opting in for a residual value or balloon payment.
What is an operating lease?
An operating lease quite often is utilised when needing to obtain an asset on a short term basis. Term is considered short compared to the useful life of the asset. With the technology world changing rapidly often equipment can be considered obsolete before the end of it’s workable life.
Accordingly, at the end of an operating lease, the lessee has several possibilities:
● Pursuit of the lease
● Return of the equipment
● Renewal of equipment
● Restoration of equipment
● Purchase of equipment at their market value
To recap on the main benefits of an operating lease:
● As they are off balance sheet so are an operating expense deductible from profits
● Improvement of cash-flow
● Economy of corporate taxes
What is a residual or balloon?
The residual value/ balloon payment can be part of a loan contract. Having a residual value or balloon payment allows you to have reduced payments throughout the loan term in exchange for a lump sum due at the end of the loan contract.
There are some great benefits to having a residual/balloon payment including that it can increase the afford ability of the loan, it can assist with cash flow management which is very useful for seasonal businesses and you can also match the loan balance to the assets value over the life of the loan.
What is interest rates and how are they determined and influenced?
An interest rate from the borrowers point of view is the cost of borrowing the money and from the lenders point of view it is the compensation for the lending risk and the service provided. There are many different types of loans and the interest rates can vary depending on different factors. Both internal and external factors can determine the interest rate offered to you.
Risk of default and inflation are determining factors in regards to interest rates offered by lenders. As a lender they may lend money today, assuming all payments are made over the loan term, by the time it is paid back the goods and services cost may have gone up, therefore your money’s original purchasing power has declined. The interest paid is to protect them against this inflation and to provide compensation for their services.
Inflation is another contributing factor to interest rates. Higher interest rates occur due to the lenders demand for compensation as the future payback will have a decreased the purchasing power of the funds. Simple example to explain inflation is:
What are some of the factors that influence the rates given on asset purchases?
If you are assessed as a low risk borrower you will likely be charged a low interest rate and if you are assessed as a high risk borrower, the interest rate offered will be higher. Your risk profile is made up through many factors like but not limited to risk profile of asset, credit rating and collateral.
Other factors are also a big part of the rates offered. Such as supply & demand of credit for domestic & international market, Government Monetary Policy and inflation.
My residual value/ balloon payment is due. What are my options?
So, you have reached the end of your loan term and your residual value/ balloon payment is due. There are three options for you to consider:
1. If you have enough cash reserves to pay it out in full without emptying the bank, then this is a good option to consider.
2. You can sell the asset and "start again".
3. Call Pure Capital Finance to discuss your refinancing options. As finance brokers we are experienced in sourcing the best asset finance for your business.
If you are in the position to consider all three options we urge that you do and may be worth getting advice from your accountant as well.
When is a deposit required for commercial asset finance?
A deposit is required should you have a high risk profile and will need to mitigate the risk with the lender. We have a broad pannel of lenders to ensure we'll match your profile with the best package available for your situation.
What's the most tax effective asset funding solution for me?
Great question and a common one. The answer isn’t a one size fits all box unfortunately. Things such as your business structure and set up can influence what would be more tax effective.
Do you have more questions? Let's have a chat:
To get started call us on (02) 4017 1116