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Equipment finance, also known as asset finance, are a way to purchase specific equipment for your business, such as cars and vehicles, machinery, new technology and other business-critical tools.
There are a number of different types of equipment financing including:
The different options all work differently and change how you purchase your business equipment. Under a chattel mortgage, you own the equipment but your lender uses the equipment as security for your loan. Under hire-purchase agreements, equipment leases and rentals, the lender owns the equipment and you are simply ‘hiring’ or ‘leasing’ it from them.
Below we go into a little bit more detail about the pros and cons of the different equipment financing options. It’s also important to be aware of the different financial implications of each option, including depreciation expense on the asset and recouping GST (if relevant).
A type of secured loan, a chattel mortgage is an equipment loan product typically used for financing vehicles or equipment. Under a chattel mortgage, a lender loans you the cash to purchase the asset, and the asset itself is then used as collateral for the life.
The key benefit of a chattel mortgage over other types of equipment financing is that you retain ownership of the asset, and means you can use the asset to generate income for your business to pay off the loan.
Other benefits include:
The main drawback of a chattel mortgage is that is you default on your loan by failing to make your repayments, then the lender can take ownership, repossess or sell the asset to recoup their loss.
Other disadvantages are:
Under a hire-purchase agreement, you don’t technically own the equipment while you are still repaying your loan, but you are able to use it during the ‘hire’ period as specified in your contract. Once the final repayment is made, ownership of the equipment fully transfers to you.
Key benefits of hire-purchase agreements include:
The main drawback of hire-purchase agreements is that the overall costs will be higher than if you had simply purchased the equipment outright. Interest rates can also be higher depending on your businesses financial position and credit rating.
Like hire-purchase agreements, under a lease agreement you also don’t own the equipment and instead ‘lease’ it from the lender by paying a regular fee (similar to renting a home). However, the key difference is that you won’t automatically own the equipment at the end of the lease agreement. At the end of the lease agreement, you may be able to purchase the equipment at its reduced value, extend the lease, or simply return the equipment. Under some types of lease agreements, the lender is responsible for maintaining the equipment, including insurance and registration costs.
The key benefit of a lease agreement is that you won’t own the equipment forever. This can be particularly advantageous for types of equipment that need to be regularly upgraded, like computers and other IT equipment or medical equipment and technology. Under a lease agreement you can quickly and easily upgrade your equipment before it becomes obsolete.
Other advantages of lease agreements include:
The drawbacks of lease agreements compared with other types of equipment loans are that like hire-purchase agreements, the overall costs is likely to be higher. Also, under a lease agreement you will never actually own the equipment and they can feature long loan terms.
Equipment rental is the most flexible form of equipment financing, allowing you to return, purchase, rent or upgrade your equipment at the end of the lease term. Like with equipment leases, it is particularly suitable for types of equipment or technology that need to be regularly upgraded. Benefits of equipment rental include greater flexibility (including the ability to borrow equipment temporarily and return it whenever you want) and lower upfront costs.
Because all equipment loans are secured by the asset, they are less risky and result in the application process being pretty straight forward. They are also generally faster to obtain than unsecured loans and other forms of business financing. iSelect have partnered with Valiant to help you to understand your different equipment financing options, and chose one to suit your unique business needs.
At iSelect we’ve partnered with Valiant to help iSelect customers compare equipment finance options from their range of products and lenders. Valiant compare a range of products from over 80 lenders across Australia, and can manage the process of finding and applying for your finance solution, as well as settling funds. Get started comparing online today!
The information in this content is general in nature and should not be considered tax advice. You should always seek professional tax advice or assistance before acting or relying on any content.
Last updated: 28/01/2021