Part 2: How Does a Business Loan Work?

Welcome to part 2 on the fundamentals of business loans. In today’s article, we will look at the difference types of security and the operation of hire purchase agreements.

As already mentioned in part 1, a business loan can either be secured or unsecured. The guarantor, the borrower, or both parties can provide the security for that loan. In general, the party lending the money will have a lower interest rate when security has been provided. This is due to the fact that the lender is at less risk when they have some security over the loan.

Security

If you are considering taking out a business loan, there are many different forms of security that you may wish to consider. The most commonly used types of security are:

• Mortgage over real property;
• A Bill of Sale, which is a charge over goods; and
• A fixed or floating charge, also known as a debenture or an equitable mortgage. It is a charge that a company will give the lender over some or all of the company assets.

Hire Purchase Agreements And Leasing

Some businesses choose to manage their financing options by obtaining equipment under equipment leasing agreements or hire-purchase agreements. These types of arrangements are different from loans in that there is no actual lending or borrowing of funds per se. Rather, the financier gets rent from the party hiring the equipment. In fact, the financier will continue to own the goods up until the final payment has been made.

In general a leasing agreement will either be categorized as a finance lease or an operating lease. Operating leases work so that the party hiring does not end up becoming the owner of the property, such as when you hire a car from a rental company

Finance leases, on the other hand, operate such that the financier eventually sells the good to the other party for its remaining value. Sometimes, if the equipment has depreciated during the term of the lease, the lessor will be entitled to compensation for this depreciation. As such, the choice between a hire-purchase agreement and a finance lease agreement will hinge on the taxation profiles on the “hirer” and “financier”

As you can imagine, a hire-purchase agreement or a leasing agreement can provide excellent substitutes to acquiring a business loan. In general, finance leases and hire purchase agreements are loans with fixed regular repayments. However, the interest rate will normally be more attractive than actually borrowing the money, as the leasing market is quite competitive, which keeps rates low.

Conclusion

If you want to finance your business and need certain equipment to get up and running, perhaps you need a business loan. You might also benefit from a hire-purchase agreement or an equipment leasing arrangement. Either way, you can speak with an equipment-leasing specialist from LegalVision and get a fixed-fee quote today. To get a quote, simply call 1300 544 755.