Equipment finance can be used to purchase assets that help your business generate income and benefit cash flow. But with so many options to choose from, making the right choice can be challenging. Your choice will depend on your own business circumstances and whether you wish to own the asset or lease it off the finance provider.
1. Equipment loan (or chattel mortgages): This kind of loan allows the business to own the asset. It effectively sits on your balance sheet and you may be able to claim depreciation and interest as a tax benefit.
If you take out an equipment loan, the finance provider lends you the funds to buy the asset, and then takes a mortgage over it. You make payments over a term, typically between two to five years, depending on the equipment’s expected effective life.
You can opt for a residual or balloon payment, for example they could defer 20% of the cost to the end of the term. This lowers regular payments, but slightly increases the overall costs. We see businesses choosing this option when they are looking for a cash flow benefit, and they’re willing to pay for it.
This is the most popular choice with over 80% of our current financing being through equipment loans.
2. Hire purchase: A fixed-term agreement where the lender buys the equipment for your business to use. Once final payment is made, you own the asset. You’ll be charged GST on the payments, fees and residual.
3. Finance lease: A fixed-term rental agreement where the lender owns the asset but at the end of the lease term, you can make an offer to buy it.
4. Operating lease: A fixed-term rental agreement where you rent the asset from your lender, who owns it. This is particularly popular for rapidly depreciating items like IT and medical equipment because there is more flexibility to update.
10 key questions to ask your finance provider when considering equipment finance
1. Can I structure the repayments to match my cashflow? For example, seasonal businesses may want to structure repayments to pay more during peak times.
2. What are the potential tax benefits and after-tax costs?
3. How long will it take to get approval and can I apply online?
4. Can I change the loan if I want to?
5. Are there any additional costs in the agreement other than the repayment?
6. How long will it take for funds to be available?
7. What is the serviceable life and warranty period of the asset?
8. How quickly does innovation replace these models?
9. Is there flexibility to opt out of owning the asset?
10. Consider the industry trends, and what is your competition doing. Will they become more efficient with new purchases before you do?
Still confused? Contact one of our specialists today on 1800 277 387.