Business Equipment Finance and Leasing
Owning a growing business can often mean purchasing new or replacement equipment. Most businesses require the use of motor vehicles, plant and equipment. Specific equipment finance is generally the most effective way to fund these purchases, via a Chattel Mortgage. It is simply a business loan with a mortgage or registered charge over the piece of equipment or vehicle.
Using your cash flow is generally not the best way to fund these purchases. This is because it can have a detrimental effect on the very thing that is critical to all small businesses. Always seek professional advice from your accountant, who will advise on what’s best for your business.
Examples of business equipment that can be financed:
- Cars, utilities and light commercial vehicles
- Trucks and buses
- Forklifts, cranes and earthmoving equipment
- Computing and office equipment
- Printing, medical and manufacturing equipment
- Industrial plant equipment
- Boats
Business equipment financing has changed over the years. The changes have a lot to do with the introduction of GST, which affects the cost-effectiveness of traditional equipment finance for many businesses.
If you’re looking to finance equipment for your business, you should be aware that some finance products will have characteristics that are more beneficial than others.
The following is a brief summary of these characteristics. For the purpose of the exercise, a number of assumptions have been made. One of the assumptions is that the equipment is used to generate assessable income.
Most importantly, remember to seek professional taxation advice for guidance on the best financial solution before making a purchase.
Chattel Mortgage
This is now the most common form of Business Asset Finance. So, if you’d like finance that enables immediate ownership of your equipment, a Chattel Mortgage loan may be the solution.
You can finance up to 100% of the purchase price, and your payments can be structured to suit your cash flow. You’ll have a fixed interest rate. Also, you can choose whether or not to have a balloon payment at the end of the contract (subject to Lender approval).
There’s no GST on your instalments, and depreciation and interest are generally tax deductible.
Lease Finance
Not very commonly used these days. This changed at the time GST was introduced into the Australian Taxation system. The main reason is like any lease, there is no ownership of the equipment. So the financier owns the equipment, rather than the business or the seller. The repayments attract GST, which impacts the business cashflow.
You can obtain 100% financing, with repayments to suit your cash flow.
The equipment is purchased by the financier and leased to the business for an agreed term – commonly two to five years.
The supplier of the goods will receive full payment for the purchase price from the financier.
The financier may sometimes allow the lessor to subsequently purchase the equipment at the end of the term, but cannot agree to this at the time of the transaction.
Equipment Loan
An Equipment Loan facility may be attractive if you use cash accounting in your business. As a result, you may be able to claim the GST component of the purchase price of the equipment in your next Business Activity Statement (BAS), after the bank has made payment to the supplier.
As the name suggests, this is a means of financing the acquisition of equipment. It involves the provision of security to the lender over nominated chattels (e.g. various plant, equipment and motor vehicle, etc.) via an Equipment Loan Agreement.
In simple terms, this type of finance is structured similarly to a property mortgage, with the equipment owned by the business, but allocated as security against the loan.
As with an Asset Purchase facility, the interest and depreciation components are usually tax deductible, as long as the equipment to be financed is used to generate assessable income. Terms for finance also normally range from two to five years.
