Finance Terms: What do they mean and how do they affect you?

Posted on 02 november 2016

When applying for finance, setting up bank guarantees for landlords, or organising accounts with your food and beverage suppliers, a lot of finance words are in the terms and conditions. These can have a wide range of effects on both your business and you personally. Understanding these terms arms you with the knowledge to make the right decision for you and your business.

Below we explore several finance terms used in contracts and forms:

Credit Checks

Credit checks allow a business to make an enquiry with a credit reporting agency on a business's or individual's credit and payment history. Typically any commercial transactions will have checks on both the business and individual. This will also leave a paper trail on each credit file, which will typically have a negative effect on the credit rating of the business and individual.

Guarantees

Guarantees often arise when seeking finance from your bank for a loan, an equipment leasing company, or when you are entering into a lease for your business premises. Check how much you may be agreeing to guarantee, or try and find an alternative site or funding solution like Silver Chef's Rent-Try-Buy®, where these are typically not required or are limited to 12 months rental agreement which is less than the value of the initial funding, before signing any documents.

A personal guarantee is an agreement by an individual to make all and any payments of a debt that a business cannot make.

A director's guarantee is similar to a personal guarantee. A director of a company agrees to make all and any payments of a debt personally if the business cannot.

A third party guarantee is again effectively the same, however the individual giving the guarantee has no direct control or interest in the business they are guaranteeing. Typically parents or spouses are asked to sign these if an individual isn't strong enough candidate take on the debt themselves.

Finance Lease (Chattel Mortgage)

A finance lease means that you own the equipment and claim depreciation. You pay interest to the finance company for using their money to buy the equipment and claim the interest cost as a tax deduction. Typically you have to pay out all remaining payments to the finance company before you can sell the asset.

Operating Lease

An operating lease means that the finance company owns the equipment. You pay a rental fee for the use of the equipment over a set payment period and typically have a residual payment (balloon) to own the equipment at the end of the agreement. You can claim 100% of payments as a tax deduction, and operating leases are usually 2-5 years long. Typically you have to pay out all remaining payments to the finance company before you can sell the asset.

Silver Chef Rent-Try-Buy® Agreement

A Rent-Try-Buy agreement means that Silver Chef owns the equipment. You pay a rental fee for the use of the equipment and commit to a short 12 month payment term. There is the option to extend the agreement with discounts applied at the end of the 12 month term, or you can return the equipment. You can claim 100% of the payments as a tax deduction and you can upgrade the equipment anytime. The option to purchase the equipment is also available at anytime and rental payments made contribute towards the purchase price.

Personal Property Securities Register (PPSR)

The PPSR is the only Australian register where details of security interests in personal property can be registered and searched. For example, a bank could make a registration for a vehicle they have financed for a business. This shows any sellers or liquidators that the bank has an interest (right) over the asset. Personal property is a legal term for any property that is not land, buildings or fixtures. Examples are:

  • Motor vehicles, boats or aircrafts
  • Crops, cattle and other livestock
  • Stock in trade, artworks and equipment
  • Other goods, new or secondhand, whether owned by businesses or individuals
  • Intangible property, such as patents, copyright, commercial (not government-issued) licences, debts and bank accounts
  • Financial property such as shares, cash or cheques

A caveat means that you agree to another party, usually a financier, to an interest or rights over your property. Caveats effectively block the sale of the property or stop other creditors using the property to secure other loans. They come in two forms: registered caveats and unregistered caveats.

Once signed, registered caveats are immediately registered with the state or territory land office.

Unregistered caveats can be registered after a breach of contract or another form of trigger. For example, if you stop paying a loan to a finance company.

Always check the fine print of your finance contracts, supply agreements and company's terms and conditions before signing and seek professional advice for guidance. A lawyer and accountant are a great place to start to understand the effects of these financial and legal instruments on you and business.

This does not constitute accounting or tax advice. Always check with your lawyer or tax accountant for advice.