The right machinery finance facility for you depends on what you’re looking to fund, your access to collateral and personal preferences.
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What is machinery finance
Machinery finance is also known as equipment or asset finance, and it’s specifically designed to fund business machinery, from vehicles and tractors to office equipment.
In this post we’ll explore the three main types of machinery finance, pros and cons of each and how to choose the right one for your business.
What machinery finance can be used to fund
Machinery finance can be used to fund any eligible business assets, including:
- Heavy machinery for construction, farming, agriculture and manufacturing
- Office machinery and supplies
- Cars and trucks
- Medical and scientific equipment
Types of machinery finance
A chattel mortgage allows you to use the asset you’re borrowing as security for your loan, meaning you won't have to put existing assets on the line. No deposit is necessary either, and you can often borrow up to 100% of your asset's value.
Note that if you become unable to meet your repayments, your lender might be able to sell your asset to recoup losses incurred. This isn't taken lightly—lenders do so as a last resort.
It's also worth noting that eligible assets include those that you intend to use for business purposes at least 50% of the time.
Hire purchase agreement
With a hire purchase agreement, you'll pay instalments to borrow your equipment. This can be a vehicle, machine or other business tool. Once you've paid it off, your lender will transfer ownership to you.
Hire purchase agreements are typically pretty flexible—for example, some lenders will let you put down a deposit to lower interest rates, while others might let you return the car during your repayment term if it’s no longer needed.
An equipment lease is a contractual agreement between you and your lender, letting you borrow and use a piece of equipment in exchange for periodic repayments.
When leasing assets, they don’t appear on your balance sheet either, meaning your debt-to-equity ratio will remain lower than if they were financed in another form (i.e. chattel mortgage).
Which type of machinery finance is best for you?
The best type of machinery finance for you depends on a few factors including whether you have any assets to use as security, how long you need the machinery and the level of flexibility you’re looking for.
Here are the pros and cons of each type, so you can explore your options further:
Chattel mortgage pros and cons
- Lower interest rate compared to unsecured finance as the borrowed asset doubles up as collateral for the loan
- Usually no downpayment is required. You can borrow up to 100% of the asset's value
- Tax benefits: in some cases you'll be able to claim depreciation and interest costs depending on how much of the asset is being used for business purposes
- Option for a balloon payment at the end of the loan term. A balloon payment lowers monthly repayments but will increase the amount of interest you pay over the course of your loan
- While your business technically owns and is responsible for the asset from the get go, you only get full title to the goods once you've paid your chattel mortgage off in full
- Claiming GST can be complex. You'll need to either have experience in accounting or hire a professional accountant who can help
- If you're planning on purchasing a used vehicle or piece of equipment, be aware that lenders might charge you more in interest to make up for the lower value of your asset
Equipment lease pros and cons
- You don't need a deposit to secure a lease
- When leasing, you only finance the GST inclusive cost, meaning lower repayments and less interest
- You can claim lease payments as tax deductions, assuming you're using the leased assets for 100% business purposes
- Fixed interest and repayments, making budgeting (and managing cash flow) easier
- No need for collateral. Your asset doubles up as security
- Interest rates for equipment leases are usually higher than those for secured loans
- Early repayment penalties could apply, not just with equipment leases but also with chattel mortgages and hire purchase agreements
Hire purchase agreement pros and cons
- If you need an asset quickly but don't want to buy it outright, you can use a piece of equipment without the responsibility of owning it
- Tax perks: you can claim depreciation and interest charges, and your monthly payments are not charged GST either
- Flexible terms and repayments. Many lenders offer a term between one to five years
- When you finish paying off your equipment, ownership will be transferred to you
- You don't own your equipment so there could be restrictions on how you use it
- Obviously, interest charges and fees need to be taken into account, as with other types of finance
Finding and applying for machinery finance
The fastest and simplest way to figure out which type of machinery finance is right for you is by speaking with a lending expert. Our experts work with a panel of 80+ leading business lenders to find a competitive rate on machinery finance, and eligible assets can also be claimed under the instant asset write off if purchased before June 30, 2022.
In addition, applying for machinery finance can take months through a bank, but via non-bank lenders the process is generally more streamlined.
Valiant can turn around funds in as little as 24 hours, and much of the paperwork and heavy lifting is done by our experts, so you can get back to running your business.
Alex is a Senior Product Expert here at Valiant specialising in asset finance. He enjoys helping clients secure the right equipment for the job, so they can get on with managing their business.