Written byEquipment finance is business finance used to buy or lease machinery, vehicles and other equipment, where the equipment itself secures the loan or is owned by the financier.
Also known as: equipment loan, plant and equipment finance, machinery finance
Key points
- The main structures are a chattel mortgage, hire purchase, a finance lease and an operating lease.
- Because the equipment is the security, lenders can often approve it faster and at a lower rate than an unsecured business loan.
- Terms usually run one to seven years and are matched to the equipment's working life, often with a balloon or residual at the end.
- The tax treatment follows the structure: own it and you claim depreciation; lease it and you claim the rentals.
How equipment finance works
You choose the equipment and the supplier, and the lender pays for it. Under a loan structure you own the equipment and the lender registers a security interest over it. Under a lease structure the financier owns the equipment and you pay to use it. Either way, the repayments are fixed for the term and the equipment can be repossessed if you stop paying.
Lenders assess the equipment as well as the business. Standard, resaleable assets such as utes, trucks, excavators and forklifts are easier to finance than specialised or fit-out items, which may need a deposit or a shorter term.
Choosing a structure
A chattel mortgage suits businesses that want ownership, depreciation deductions and the GST credit up front. Hire purchase gives the same end result with ownership arriving at the last payment. A finance lease suits businesses that want to keep capital free and claim the rentals, and an operating lease suits equipment you plan to hand back, such as IT hardware or fleet vehicles.
The structure also changes how the equipment appears in your accounts, so it is worth talking to your accountant before you sign.
Who uses equipment finance
Trades and construction businesses financing utes, vans and earthmoving gear; transport operators financing trucks and trailers; manufacturers, farmers and medical practices financing specialised machinery. Start-ups and businesses with limited trading history often find equipment finance easier to obtain than an unsecured loan because the asset carries part of the risk.
If you need cash rather than a specific asset, a business loan or a line of credit is usually the better tool.
Example
A café wants a $30,000 commercial oven. Rather than draw down its cash, the owner finances it over five years under a chattel mortgage: the lender pays the supplier, the café owns the oven from day one, claims the GST in its next BAS and depreciates the oven over its effective life. The repayments are fixed for the term, and the oven itself is the lender's security.
Not to be confused with
- Asset finance
- asset finance is the umbrella term; equipment finance is the part of it that covers plant, machinery and equipment
- Business loan
- a business loan is cash lent against the business generally; equipment finance is tied to, and secured by, a specific piece of equipment
Frequently asked questions
What is the difference between equipment finance and a business loan?
Equipment finance pays for a specific asset and uses that asset as security, so approval tends to be quicker and the rate lower. A business loan gives you cash to use as you choose, is assessed on the business rather than an asset, and is often unsecured or secured against property.
What can be financed with equipment finance?
Almost any income-producing business asset: vehicles, trucks and trailers, earthmoving and agricultural machinery, manufacturing plant, medical and dental equipment, IT hardware, and fit-outs. Standard, resaleable equipment is the easiest to finance; specialised or fixed items may need a deposit or a shorter term.
Is equipment finance tax deductible?
The deductions depend on the structure. Under a chattel mortgage you own the equipment, and under hire purchase you are treated as the owner for tax, so either way you claim depreciation and the interest. Lease it and you claim the lease rentals. GST credits follow the same split: up front on a purchase, on each rental under a lease.
Can a new business get equipment finance?
Often, yes. Because the equipment is the security, some lenders will finance standard assets for businesses with a short trading history or on a low-doc basis, sometimes with a deposit. Terms and conditions vary by lender and are subject to approval.
Related terms
Broader term: Asset finance
Asset finance
Asset finance is the umbrella term for business finance that pays for vehicles, equipment and other income-producing assets, with the asset itself acting as the security.
Read definitionChattel mortgage
A chattel mortgage is a business loan for a vehicle or equipment: you own the asset from settlement and the lender holds a security interest until it is repaid.
Read definitionHire purchase
Hire purchase is a finance agreement where a financier buys an asset and hires it to you for fixed instalments, with ownership passing to you at the final payment.
Read definitionFinance lease
A finance lease is a lease where the financier owns the asset and your business pays to use it for most of its life, taking on the risks of ownership.
Read definitionOperating lease
An operating lease is a lease where you pay to use an asset for a set term and hand it back, with the financier keeping ownership and the resale risk.
Read definitionDepreciation
Depreciation is the fall in an asset's value over time, spread across the years the asset is used so the cost can be claimed as a tax deduction.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.