Choosing how to fund business equipment can affect cash flow, ownership, tax treatment and the flexibility to upgrade later. This comprehensive guide equipment finance overview explains common options available in Australia, along with the questions that may help business owners compare them.
What equipment finance can cover
Equipment finance is a broad term for funding used to acquire business assets rather than paying the full purchase price upfront. Depending on the lender and the business, it may apply to assets such as vehicles, plant and machinery, technology, medical equipment, office fit-outs and specialised tools.
The available structure, security requirements, deposit, term and end-of-term arrangements can vary. Lenders commonly assess the asset being financed as well as the business’s financial position, trading history, cash flow and the purpose of the purchase.
Key points to compare
A comparison may include the total cost of finance, interest rate, fees, repayment frequency, loan term, security, insurance obligations and whether a residual or balloon payment applies. It can also be useful to consider how long the equipment is expected to remain productive and whether it may become outdated quickly.
Tax and accounting outcomes differ between structures and businesses. A registered tax agent or accountant can explain how a particular arrangement may apply to your circumstances.
Chattel mortgage
A chattel mortgage is a business loan used to purchase an asset. The borrower generally owns the equipment from the outset, while the lender takes a mortgage over it as security until the finance is repaid.
This structure may suit businesses that want ownership of the asset and a defined repayment arrangement. Terms can sometimes include a deposit or a balloon payment, which may lower regular repayments but leaves an amount payable at the end of the term. A balloon can affect future cash flow planning and may need to be refinanced, paid out or covered through sale proceeds, depending on the circumstances.
Points to consider with a chattel mortgage
Consider the asset’s likely resale value, expected working life and whether a balloon payment aligns with the business’s future cash flow. The equipment may be repossessed if repayment obligations are not met, and fees or other costs may apply under the finance contract.
Finance lease and operating lease
A finance lease involves a lender purchasing the equipment and leasing it to the business for an agreed period. The business makes lease payments and may have options at the end of the term, such as paying a residual amount, refinancing, returning the asset or entering a further arrangement. The specific options depend on the contract.
An operating lease is generally designed around using an asset for a set period rather than owning it. At the end of the lease, the equipment is commonly returned, although the contract sets out the available arrangements. This may be relevant for assets that are replaced regularly, such as certain technology or vehicles.
Lease trade-offs
Leasing may help preserve working capital because the business is not paying the full purchase price upfront. However, the business may not own the asset, return conditions can apply, and the total cost over the agreement may differ from purchasing with a loan. Early termination may also involve charges or other contractual obligations.
Hire purchase and other arrangements
Under a commercial hire purchase arrangement, the financier purchases the equipment and hires it to the business. Ownership commonly transfers after the final payment is made, subject to the contract terms. This can provide a pathway to ownership while repayments are spread over an agreed period.
Some suppliers also offer vendor finance or rental arrangements. These can be convenient where equipment and funding are arranged together, but it remains important to compare the full contract terms, including pricing, fees, maintenance responsibilities, insurance and end-of-term conditions.
Matching the structure to the equipment
The right structure can depend on whether the asset is expected to retain value, how frequently it will need replacing, how essential it is to operations and whether ownership at the end of the term is important. It may also depend on the business’s cash flow patterns and eligibility under a lender’s criteria.
For any repayment illustration, actual repayments depend on the loan amount, interest rate, fees, loan term, lender assessment and the borrower’s individual circumstances.
Preparing to compare equipment finance
Before discussing finance, it can help to have a clear quote or invoice for the equipment, details of the supplier, information about the business’s trading position and a realistic view of the asset’s expected use. Asking for a breakdown of repayments, fees, security and end-of-term obligations can make different offers easier to assess.
Equipment finance is not suitable for every business or every asset purchase. Missed payments can have consequences for the business, its credit profile and the secured equipment. Independent accounting and legal guidance may be relevant where the contract is complex or the purchase is significant.
Heart Financial can provide general information about equipment finance options and help explain the lending process. Speak with Heart Financial and a suitably qualified professional about options that may be relevant to your business circumstances.
