Equipment Loans and Financing

What is equipment financing?

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.

What are the different types of equipment financing?

There are a number of different types of equipment financing including:

• Chattel mortgages (commonly referred to as an equipment loan)
• Hire-purchase agreements
• Equipment leases
• Equipment rentals

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).

Chattel mortgages

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.

What are the benefits of a chattel mortgage?

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:

• Interest rate: Because the asset is used to secure the loan, they are seen by lenders to be lower risk and as such often feature lower interest rates than unsecured loans.
• Longer terms and higher loan values: Given chattel mortgages are seen as less risky, lenders tend to offer higher maximum loan values as well as longer loan lengths.
• Less hassle: Because the asset itself is used as security for the loan, the lender is unlikely to need documentation on your credit or financial history
• Potential tax benefits: Unlike other forms of equipment financing, under a chattel mortgage you own the asset. This means you may be able to claim interest and depreciations costs depending on the percentage of business use. However, always seek professional advice from a tax accountant.  
• Not impacted by existing debt: Even if you have existing debts, you may still be approved for a chattel mortgage because it is secured by the asset you are purchasing.

What are disadvantages of a chattel mortgage?

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:

• Asset costs: You remain responsible for the costs of running and maintaining the asset (such as new tires and fuel for a work car), on top of repaying the loan.
• Less flexibility: You can’t liquidate or upgrade the asset until you’ve fully paid off the loan.

Hire-purchase agreements

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:

• Flexibility: Hire-purchase agreements allow flexibility to make deposits upfront (bringing down the repayment costs), ‘balloons’ at the end (lowering repayments throughout but resulting in a larger lump sum at the end of the contract) and the ability to return the asset to the lender during the ‘hire’ period if it is no longer suitable or needed.   
• Tax deductible: Unlike a standard lease agreement, repayments under a hire-purchase agreement are tax deductible and the equipment is not considered either an asset or liability to the business.

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.

Equipment lease agreements

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:

• Tax benefits: Not only are lease repayments tax deductible but you don’t have to pay the GST on the asset – this is paid by the lender.
• Cheaper: Lower upfront costs mean lease agreements are often cheaper and down payments generally aren’t required
• No maintenance costs: The lender remains responsible for all ongoing maintenance costs.

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 rentals

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.

How do I apply for an equipment loan?

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.

Looking for equipment finance? Compare from Valiant’s range of products and providers

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