Everything you need to know about equipment finance

Need a new tractor for your commercial farm or perhaps more advanced imaging technology for your clinic? Or maybe it's time to refurbish your cafe? Whatever equipment you're after, buying it upfront can take a huge toll on your small business's financial health.

The good news is that with the right funding solution, you can acquire the business equipment you need while spreading the cost over time. Read on as we do a deep dive into the topic of equipment finance.

What is equipment finance?

Equipment finance, also known as machinery or asset finance, is specifically designed to fund business machinery—think tractors, commercial ovens, office equipment, and more.

What can you buy with equipment finance?

Equipment finance can be used to fund any eligible business assets, including:

• Heavy machinery for construction, agriculture, and manufacturing
• Office machinery and supplies, like laptops, phones, and printers
• Cars, trucks, utes, and other commercial vehicles
• Medical and scientific equipment
• POS systems
• Furniture and fixtures
• Restaurant equipment, including commercial ovens, walk-in fridges, and cooking tools
• IT equipment

Types of equipment finance

There are 3 main types of equipment finance:

Chattel mortgage

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 installments to borrow equipment for your business. 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.

Lease

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, meaning your debt-to-equity ratio will remain lower than if they were financed in another form (i.e. chattel mortgage).

Which type of equipment finance is best for you?

The best type of equipment loan 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 finance options further:

Chattel mortgage pros and cons

Pros

• Interest rate is lower compared to unsecured finance as the borrowed asset doubles up as collateral for the loan;
• Usually, no down payment is required. You can borrow up to 100% of the asset’s value;
• There are 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;
• There's the 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.

Cons

• You only get full title to the goods once you’ve paid your chattel mortgage off in full, even though your business technically owns and is responsible for the asset from the get-go;
• 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 used equipment, lenders might charge you more in interest to make up for the lower value of your asset.

Hire-purchase agreement pros and cons

Pros

• You can use a piece of equipment without the responsibility of owning it, which is useful if you need an asset quickly but don’t want to buy it outright;
• There are tax perks. You can claim depreciation and interest charges, and your monthly payments are not charged GST either;
• You can enjoy flexible terms and repayments, with many lenders offering a term between 1 and 5 years;
• Ownership will be transferred to you when you finish paying off your equipment.

Cons

• You don’t own your equipment, so there could be restrictions on how you use it;
• Interest charges and fees need to be taken into account, as with other types of finance.

Equipment lease pros and cons

Pros

• You don’t need a deposit to secure a lease;
• You only finance the GST-inclusive cost, meaning lower loan 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 make budgeting (and managing cash flow) easier;
• You don't need collateral, since your asset doubles up as security.

Cons

• 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.

Finding and applying for equipment finance

The fastest and simplest way to figure out which type of equipment 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.

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.