Equipment Finance overview
What Is Equipment Financing?
Equipment financing is a great way to purchase a specific piece of equipment, including vehicles, machinery, technology and business-critical tools. Equipment finance is also known as asset finance.
The different types of equipment finance change how you purchase equipment for your business. Under some of these arrangements, the lender becomes the owner of the equipment, and you are just ‘hiring’ or ‘leasing’ it from them for business purposes (even though you will select, purchase, pick-up, house and run the equipment!). In other cases, you are the owner of the equipment, but the bank uses the asset as security for the loan.
Deciding between these options requires a careful consideration of cash available to contribute to the equipment as well as important financial consequences like having access to the depreciation expense on the asset, and recouping GST (if applicable).
What Is An Equipment Loan/Chattel Mortgage?
Think of this as a regular loan, where the lender gives you cash to buy an asset and then takes that asset as security in case you fail to repay the loan (just like a residential mortgage). This is how an equipment loan or chattel mortgage works. The lender will give you the cash to purchase the equipment then use the equipment as security for the money you are borrowing from them.
Pros & Cons Of An Equipment Loan/Chattel Mortgage
Pros: ✓ Less Documentation ✓ Works Alongside Other Loans ✓ No Additional Collateral ✓ Immediate Ownership
Cons: X Lacks Flexibility X Asset Costs
Benefits Of An Equipment Loan / Chattel Mortgage
Equipment loans and chattel mortgages are popular methods of financing new pieces of equipment. This is because, first and foremost, you own the piece of equipment and are not subject to any restrictions on how to use it (as you would be with a hire purchase agreement). The equipment is also the only security that is required for the loan, making it a lot easier to keep your other assets unencumbered.
Chattel mortgages/equipment loans also get favourable GST treatment. As you are making the purchase upfront, you can claim back any GST input credit in full at the time of purchase. This becomes especially valuable on larger purchases.
✓ There Is Typically Less Documentation Required Unlike traditional business loans where lenders require your credit score and financial history documentation, a chattel mortgage requires less documentation. This is typically because the equipment itself is used as security for your loan.
✓ Equipment Finance Can Be Offered Even If You Have Debt Many lenders will still provide equipment financing to a business even if they have outstanding loans. This is because the equipment provides additional security for the loan, reducing the risk to the lender.
✓ There Is Typically No Need For Additional Security Most business loans require that the business puts up an asset as security. Equipment financing uses the equipment you are purchasing as collateral so you don't need to have additional assets.
✓ The Asset Is Yours From The Outset Unlike a hire purchase agreement, with a chattel mortgage the asset is yours from the outset.
Drawbacks Of An Equipment Loan / Chattel Mortgage?
Equipment loans often have higher credit requirements and can require a larger contribution upfront. Equipment loans also tend to have higher fees compared to hire purchase agreements or leases, as setting up the equipment loan costs the lender more time and documentation compared to other types of equipment financing.
It's worth noting that, since you own the asset, there is no option to return it to the lender. Further, the equipment will sit on your balance sheet as an asset (with the chattel mortgage on your balance sheet as a liability).
X A Chattel Mortgage Doesn’t Offer Flexibility If you want to upgrade your equipment or get rid of your equipment, you will need to repay your loan and an early termination fee may apply.
X You Are Responsible For All Asset Costs Unlike when you are leasing equipment, you are responsible for all of the costs associated with running the equipment.
What Is A Hire-Purchase Agreement?
This form of equipment finance is where a contract is drawn up to purchase a piece of equipment over time from a lender. Technically you don’t own the equipment while making the payments but you are entitled to use it during this ‘hire’ period. Then, when the last payment is made, ownership of the piece of equipment is transferred to you.
Hire-purchase agreements can be structured flexibly to include deposits upfront (to bring down future repayments), ‘balloons’ at the end (lowering repayments but requiring a larger lump sum payment at the end), and the ability to return the asset to the lender during the ‘hire’ period if it is no longer required.
Pros & Cons Of A Hire-Purchase Agreement
Pros: ✓ Tax Deductable ✓ Payment Flexibility ✓ Fixed Interest
Cons: X Secured Against Equipment X Non-Ownership X Expensive
Benefits Of A Hire-Purchase Agreement
As noted above, the flexibility of repayments, upfronts, and balloons is a big benefit of hire-purchase agreements.
Repayments are tax-deductible expenses, and you can claim depreciation on the equipment (even though you don’t technically own it). This means that hire-purchase will often confer more tax benefits than just leasing the equipment, particularly in the early years of the agreement.
There can also be benefits in terms of financial reporting. During the hire period, the equipment is not owned by the business, so neither the equipment (asset) nor finance (liability) will be on your balance sheet. Instead, the repayments appear on the profit & loss statement as an expense. This can make business performance metrics look superior to owning the asset outright, depending on the business.
✓ Your Repayments Are Tax Deductable Depending on how your hire-purchase financing is structured you may get some tax benefits. Repayments are tax-deductible expenses, which offers advantages that a standard lease agreement does not. And the equipment is neither an asset nor a liability to the business.
✓ Offers greater Payment Flexibility Paying the equipment off over a period of time is likely far more affordable and accessible than a one-off large upfront payment.
✓ The Interest Rate Can Be Fixed Most hire-purchase agreements also have a set repayment schedule which does not change, even if bank interest rates rise.
Drawbacks Of A Hire-Purchase Agreement
Whilst hire-purchase is a great way to steadily integrate a new piece of equipment into your business, you should also keep in mind that the entire cost of the hire-purchase agreement will be higher than an upfront purchase of the equipment (since the finance provider needs to make a profit).
X The Loan Is Secured Against Your Equipment If you fail to make repayments, your asset may be at risk of being repossessed.
X You Don’t Own the Equipment Until The Final Repayment The lender of your hire-purchase equipment financing are the legal owners of the equipment up until you have made the final repayment.
X It Could Be Expensive Depending on your cashflow, credit rating and specific situation, you may incur a higher interest rate. If you require long-term financing, this will also increase your total repayment.
What Is A Lease Agreement?
A lease is similar to a hire-purchase agreement in that you do not own the piece of equipment you are using. Instead, you are ‘leasing’ it from the lender by paying a regular ‘rental’ fee (similar to renting an apartment). However unlike a hire-purchase agreement, you may not automatically own it at the end of the repayment period. Depending on the terms of the agreement with the lender you may have the option of purchasing the equipment at its depreciated value, extending the lease period, or returning the equipment.
Further, depending on the type of lease, the leasing company may stay responsible for maintenance, registration and insurance costs (meaning these costs end up being included in the rental payment in order for the finance company to make their profit!). In comparing leases with other finance options, it is important to know who ends up paying for these costs so that you can compare apples to apples.
Pros & Cons Of A Lease Agreement
Pros: ✓ Lower Expense ✓ Tax Benefits ✓ Easier To Obtain ✓ Upgradable ✓ No Maintenance
Cons: X Higher Cost X No Ownership X Term Lengths
Benefits Of A Lease Agreement
Using a lease to get new equipment is often fast and easy, as the vendor of the equipment may offer the lease agreement themselves as part of the sale process. Leases are often preferred when you don’t actually want to own the equipment forever, and would like to upgrade after a known period of time (e.g., with computer equipment that becomes obsolete quickly).
Lease payments are tax deductible just like interest on a business loan. Additionally, you do not pay the GST on the asset - the lender owns the asset fully so they handle the GST whilst you only pay for the ex-GST cost. If your lease is an operating lease, then the lessor may be responsible for maintenance and repairs on the equipment. Finally as you are leasing the asset you don’t have the equipment on your balance sheet – either an asset or a liability.
✓ Lower Upfront Cost Leasing equipment is one of the cheapest ways to quickly access assets. A down payment is typically not required, so if you don’t have the cash right now, you may still be able to get the equipment you need in your business.
✓ They Offer Tax Benefits The lease payments on your equipment can typically be deducted from your business as an expense on your tax return.
✓ Leases Are Easier To Obtain Because the equipment you are leasing is a form of collateral, lease financing is much easier to obtain than a traditional business loan. There is less risk to the lender, which means the application process and rates are better.
✓ You Can Upgrade Your Equipment Leasing allows you to upgrade your equipment far more often than when you purchase equipment outright. This is perfect for businesses purchasing equipment that dates quickly, or may be at risk of becoming obsolete.
✓ There Are No Maintenance Costs Equipment maintenance can be costly. Leasing equipment can remedy this qualm, leaving the time and cost burden with the lender.
Drawbacks Of A Lease Agreement
Whilst leasing offers many benefits, it also has some drawbacks. These include not being to include depreciation expense on the equipment to lower your tax bill.
Further, a leasing arrangement will have terms and conditions on allowed uses of the asset in order to preserve its value for the lender. You may have to work these use restrictions into your operating processes or at least be aware of them if an extraordinary use-case for the equipment comes up.
If you have a purchase option under an equipment finance lease but don’t purchase the equipment and the lender needs to sell it on the market, you may be liable if the sale price is less than the depreciated value of the equipment, so look out for this in the terms and conditions.
Early termination of the lease can also incur fees from the lender, which is worth keeping in mind your business needs are likely to change.
X The Cost You Pay Will Be Higher The amount you pay over the period of time that you lease the equipment is typically more than what you would have paid up-front.
X You Will Never Own The Equipment A standard equipment lease agreement will not result in equipment ownership.
X The Length Of Your Term Lease Some lenders may require that the minimum lease period is longer than you may like. This means you may end up paying more for equipment that you no longer end up using.
Eligibility criteria is dependent on the lender, type of equipment financing and your specific business. We can work with you to find the right lender and terms for your business, simply give us a call on 1300 780 568.
In most cases however, you will be eligible if:
- You have an ABN that is registered for GST
- The equipment is to be used for business purposes
- You have a decent credit rating
- Your business has been registered for 12 months
How Do You Apply For Equipment Financing?
The application process is relatively straight forward. Use our online loan finder to find the right equipment financing for your business and see if you are eligible. From there one of our lending specialists will give you a call to discuss your specific business requirements, source the documents the lender needs, and complete the application.
Frequently Asked Questions
How long will it take before I get my equipment financing? The online loan wizard takes just a couple of minutes, from there you will need to provide us with the required documentation and we can work with the lender to get you funds as quickly as 1 business day.
Can I get equipment financing if I’ve already purchased the equipment? Even if you have already purchased the equipment, it may not be too late to setup financing. There is potential to reimburse you for the cost to free up your funds.
Can I get equipment financing for multiple pieces of equipment? Rather than applying multiple times, there are ways we can set up financing for multiple pieces of equipment.
Who offers equipment financing? There are a large number of Australian lenders offering equipment financing. These range from the big banks as well as other financial institutions. We work with over 70 lenders, so we can help you find the right lender for your business.