The Top 5 Equipment Finance Options

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Chattel Mortgage (or Secured Loan Agreement)

This is basically a fixed-term loan secured on the asset you are buying. Similar to a how a home loan works, but over a shorter period.

The equipment is yours from the outset, although as it forms collateral for the loan you won’t be free to dispose of
it until the loan is fully repaid. If you do need to sell, you’ll have to get approval from the lender, pay out the balance of the loan, and probably pay an early termination fee.

Most lenders will allow you to structure your chattel mortgage repayments to suit your business – you could agree monthly or quarterly payments, for example, or match your repayments to seasonal cash flow. You may opt to repay the entire loan and interest over a series of equal instalments – or pay lower instalments and clear the balance with a ‘balloon’ payment at the end of your finance term. At that point, you’ll be free to sell the asset to cover the residual cost.

Suitable for:

high-value equipment with a medium or long lifespan, which is unlikely to become obsolete during the term of the loan, e.g. industrial plant and machinery, agricultural vehicles, or retail / restaurant fit-outs.

Pro’s:

The asset is legally yours from the outset. At the end of the contract you can sell it for the residual value or continue using it in your business.
Your interest payments will generally be tax deductible, and you may be able to claim a deduction for depreciation of the asset.
You can often structure your loan term and repayments to suit your cash flow.

Con’s:

No flexibility – the only way to upgrade your equipment is to pay off your loan and take out a new chattel mortgage and you may have to pay an early termination fee.
You won’t be able to dispose of the asset as long as you’re using it as security for your loan.
You’ll have to record the asset and the loan obligation on your balance sheet, which will reduce your general borrowing capacity and impact performance ratios like ROI.

Commercial Hire Purchase

Commercial hire purchase is a ‘tripartite’ agreement, between you, whoever is selling the equipment, and the finance company. The financer will purchase the equipment from the seller, and you will then buy it from them in instalments over an agreed period of time.

With a hire purchase agreement, you can expect to pay an initial deposit and a series of repayment instalments, with or without a balloon payment at the end.

When you make the final payment, the ownership of the asset will pass to you, and you will be free to use or dispose of it as you wish. Until that point, although the financer remains the legal owner, you’ll have full use of the equipment, as well as all the risks and benefits of ownership.

With hire purchase finance you will often be able to negotiate the term of the contract and arrange a repayment schedule that coincides with your cash flow.

How does a commercial hire purchase work? - Diagram

Suitable for:

assets with medium value and lifespan, e.g. power tools, commercial kitchen equipment, vehicles.

Pro’s:

You can usually tailor the term and conditions of the hire purchase agreement to suit your business needs and cash flow.
The asset becomes yours at the end of the loan period.
As the hire purchaser, you will generally be able to claim a tax benefit for depreciation of the asset.

Con’s:

Immediate outlay in the form of a deposit.
If the equipment is obsolete by the end of the contract, you will be responsible for its disposal.
You are responsible for maintenance of the asset during the life of the loan, even though you don’t yet own it.

Finance Lease (also known as a capital lease)

Finance leases are generally used for high-value purchases with a medium or long lifespan. They are a common alternative to a chattel mortgage, and will put you, as the lessee, in a similar position as if you had used a loan to buy the asset.

Legally, a finance lease ‘transfers substantially all of the risks and rewards of ownership of the asset to the lessee’.

Under a finance lease, your lender will purchase the equipment direct from the seller, and then rent it to you for the duration of the agreement. In return, you will pay regular lease payments, with or without a balloon payment at the end.

You will not own the asset during the agreement, but you will be responsible for maintenance and running costs, and for the cost of repairing any damage.

A finance lease usually runs for most, or all, of the asset’s expected lifespan. Over the term of the lease, the financer will generally recoup the full purchase price of the asset, plus interest.

At the end of the lease you will usually have a variety of options:

Return the asset to the lender.
Make an offer to buy the equipment from the lender.
Lease the asset for another period, usually at very low cost (‘peppercorn rent’).

Suitable for:

high value equipment with a medium or long life-span which is unlikely to become obsolete quickly, e.g. large commercial machinery, medical equipment.

Pro’s:

No deposit payment.
Medium or long-term agreement that spreads the cost over the full economic life of the asset.
At the end of the lease period you will usually have the option to buy the asset, or lease it for a further period at a low rent.

Con’s:

Limited flexibility – to upgrade your equipment you will need to end the finance lease agreement and take out a new one. Early termination – if permitted at all – may incur substantial fees.
You will have to record your finance lease obligations as a liability on your balance sheet.
You will be responsible for maintenance and running costs of the asset during the lease.

Operating Lease (or Rental Agreement )

An operating lease is a short- to medium-term financing option (commonly 12 to 60 months) that offers you maximum flexibility. It is ideal if you want to be able to upgrade your equipment as soon as a better alternative becomes available.

As with a finance lease, your lender will purchase the asset on your behalf and then rent it back to you in exchange for regular lease payments.

Under an operating lease you will not own the asset, and you won’t have the option to buy the equipment at the end of the lease. Instead, you’ll return the asset to the lender at the end of the contract, who will then sell it or lease it to another client. Under many operating leases, the lender will be responsible for maintenance and service of the asset during the lease period.

An operating lease usually only covers part of an asset’s useful life. Once the contract ends you can easily upgrade your equipment – in fact, many operating leases allow you to upgrade during the term of the lease, with a simple amendment to the contract and lease payments. Under some leases, the lender will upgrade your equipment automatically, on agreed terms.

How does an operating lease work? - Diagram

Suitable for:

lower value equipment and technology with a short life span and high likelihood of obsolescence, e.g. IT and telecoms equipment.

Pro’s:

Total flexibility – you can easily upgrade your equipment so there’s no risk of being stuck with obsolete equipment.
Your lease payments will generally be tax deductible.
You won’t have to record the purchase on your balance sheet, improving performance ratios like ROI.

Con’s:

At the end of the period you do not own the asset – you have paid only for its use.
You cannot claim a tax deduction for depreciation of the asset.
Flexibility usually comes at a cost!

Unsecured Business Loans

Unsecured business loans can be used for any purpose. However due to the higher cost of these loans it’s best to use these for short term funding requirements.

How does an unsecured business loan work? - Diagram

Suitable for:

You could consider this type of loan when you need a piece of equipment which will increase your output or efficiencies. The additional output should outweigh the cost of the loan.

Pro’s:

Quick access to capital
No paperwork
Unsecured (no collateral or security has to be provided)

Con’s:

High interest rates

Quick comparison table

Type	Overview	Suitable for...	Main Pro	Main Con
Chattel Mortgage	Like a home loan for equipment, but shorter. The equipment is yours, but secured until paid off (like a home loan).	High value equipment such as plant which will not become obsolete during the term.	The asset is yours.	Cannot dispose of the asset whilst being used as security.
Commercial Hire Purchase	The lender purchases the asset from a supplier. You then purchase it from the lender over an agreed period by way of initial deposit, regular repayments and a final balloon payment.	Medium value and lifespan equipment such as tools, kitchen equipment.	The asset is yours.	Upfront deposit required.
Finance Lease	The lender purchases the asset from a supplier and then rents it to you. You are responsible for maintaining the asset even though you do not own it. At the end of the lease you can continue to lease it for another period, return it or make an offer to purchase it.	High value equipment such as large commercial machinery with a medium to long lifespan.	No deposit.	You cannot upgrade the equipment until end of lease.
Operating Lease	Like a finance lease, but for a shorter period. It only covers part of the assets lifespan. Usually no option to buy the equipment at the end of the term.	Lower value equipment with a short lifespan, such as IT equipment.	Can easily upgrade your equipment.	You never own the equipment.
Unsecured Business Loans	A loan which is not secured against the equipment. Whilst they attract a higher interest rate they are often hassle-free and fast and do not require lots of paperwork.	Can be used for virtually any purpose.	You are free to purchase any asset and dispose of it.	Higher interest rate.

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What is equipment finance?

Equipment finance is a specialised form of business finance. It is offered for the purpose of buying specified equipment, tools or fixtures, and is generally secured on the assets you are using it to purchase.

Depending on the lender and the type of equipment you’re buying, you may be able to get asset finance for either new or second-hand equipment. The term of your equipment finance will usually be tied to the expected (remaining) life of the asset – commonly between 12 and 60 months (although longer term finance is available for certain types of assets, such as heavy construction equipment).

There are several types of equipment finance, each with their own pros and cons. With some types you won’t have to pay an up-front deposit, so there’s no lump-sum hit to your cash flow, although you may need to pay an application or set-up fee for the facility.

In some cases, you’ll pay off the full amount of the principal and interest in equal installments, while other forms of equipment finance will leave you with a larger residual or ‘balloon’ payment at the end of the loan term, to cover the remaining value of the asset. Opting for a balloon will lower your monthly repayments, but increase the amount of interest you pay in total. Use our business loan calculator to see your options.

The type of equipment finance you take out will dictate:

How much you’ll end up paying (in interest rates, fees and charges).
Whether you or the lender will own the asset.
How easy it will be to upgrade or sell your equipment during the term of the loan.
Whether you can claim a tax deduction for your finance costs or depreciation.
What happens at the end of the contract.

The most suitable loan for your business will depend on your financial and commercial circumstances, your tax position and the nature of the asset you’re buying, so it’s important to seek independent financial advice before you apply.

When should I use equipment finance?

The main reason small businesses use equipment finance is cash flow. It might be a viable option for your business if you:

Need to fit out your premises or buy major equipment you could not afford to purchase outright.
Wish to spread the cost of your equipment purchases to avoid depleting your precious working capital.
Want to know exactly how much you’ll pay so you can budget accurately (with leases and hire purchase contracts, you’ll generally make regular payments based on a fixed rate of interest. A chattel mortgage can be based on a fixed or variable interest rate).
Want to keep the asset purchase off your balance sheet, to improve your performance ratios (to achieve this you’ll need to opt for an operating lease).
Want the benefit of using equipment with the flexibility to upgrade regularly (again, you’ll need an operating lease).

Remember take advice from your accountant or financial advisor before choosing an equipment finance product, as it can be difficult to navigate the wide range of options and to understand the full financial and tax implications.

What are the interest rates on equipment finance?

In general, equipment finance can be more expensive than small business loans, especially secured bank loans.However, there are a great many equipment finance providers to choose from, and since the loan is secured on the asset you’re buying, it’s lower risk than unsecured borrowing. This means that equipment finance can be easier to come by than other forms of business finance (especially bank loans, which have notoriously low approval rates). Some vendors (commonly vehicle dealers) may offer even offer equipment finance as one of their services.

You’ll still need to meet basic lending criteria, of course. And as with any form of business finance, the higher the risk you present to a lender, the more you can expect to pay for your loan.

The amount you will pay in interest will depend on many factors:

What type of finance you choose
The type of asset you wish to buy
Whether the asset is new or second-hand
The cost of the asset
The term of the loan
The frequency of repayments
Whether you pay equal instalments or have a residual lump sum (balloon) payment

For this reason, most lenders don’t actually advertise the interest rates for their equipment finance.

It’s no easy job to track down and compare interest rates (and other charges) for the massive variety of equipment loans on the market. A reputable broker will be able to save you time and help you understand the terms and conditions of each product, so you can choose the right equipment finance for your business.

How do I apply for equipment finance?

If you choose to work with a finance broker, they will help you manage the application process.

If you prefer to apply direct, your first step will be to check that you meet the lender’s criteria (e.g. an ABN and GST registration, an acceptablae credit rating, a minimum level of turnover, a maximum level of other debt).Next, make sure you collect all your supporting documents (e.g. proof of identity, financial records, details of the asset you wish to purchase) before applying.

Some lenders have a simple, online application procesas for their equipment finance products, and offer conditional approval on the spot. Others will ask you to contact them for a quote, and then contact you by phone to progress your application.

Generally, you can expect a simpler application process and a speedier response from an alternative lender or equipment finance specialist than from a high street bank.

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Equipment finance considerations for your industry

Manufacturing

Restaurants

Medical

Retail

Mining

Tradespeople

See more industries here.

Equipment Finance for Manufacturing Businesses

Equipment finance for manufacturing businesses

Setting up a manufacturing business requires a major outlay on specialist equipment before you can begin production. As your business expands you may need to purchase more plant and machinery to increase your capacity, or to keep up with your competitors as technology advances and best practice evolves.

For high value manufacturing equipment with a medium or long lifespan, a chattel mortgage or finance lease may be the most suitable option. These forms of equipment finance will both allow you to take possession of your equipment without a heavy up-front investment, so you’ll have cash available for ongoing costs like raw materials and labour. In both cases, you’ll need to record the asset and the finance liability on your balance sheet.

With a chattel mortgage you’ll own the asset immediately but spread the cost over an agreed period (typically up to five years). However, the equipment will be used as security for the loan, so you won’t be able to dispose of it without the lender’s approval until the loan period ends.Depending on the lender, your repayments may be based on a fixed or variable interest rate. You may pay off the loan and principal in equal instalments, or make lower regular payments and pay a residual balloon payment at the end of the lease.Generally, you will be locked into the loan for the full period, with hefty fees for early termination. However, you will generally be able to negotiate repayment terms based on your cash flow.
With a finance lease, the lender will purchase the manufacturing equipment on your behalf and then lease it to you in exchange for a regular fixed rental payment. The lease period is usually close to the full expected lifespan of the asset, which means you can spread the cost and have complete certainty over your budgeting.While you will not own the asset, you will have all the risks and benefits of ownership. That means that you will be responsible for maintenance and repairs.At the end of the lease period you will generally have a range of options – buy the asset for an agreed price, return it to the lender, or lease it for another period, usually for a very low ‘peppercorn’ rent.

Equipment finance for restaurants

As a restaurant owner you’ll have a wide range of equipment and fit-out costs to cover. Setting up your commercial kitchen and dining area will be a substantial investment, and equipment finance can help you spread the cost, freeing up your working capital for variable costs such as ingredients, breakables and wages.

A chattel loan may be the most suitable option for your dining area fit-out. Generally, you’ll be able to agree a loan period of up to five years, and a flexible repayment schedule tied to your anticipated income (especially if your cash flow is highly seasonal because of your location or type of cuisine). You may also be able to fix your interest rate for budgeting certainty.
Most commercial cooking and restaurant equipment will have a medium-term lifespan and may be ideal for a hire-purchase arrangement, where the financer will purchase the equipment on your behalf and then sell it to you in fixed instalments over an agreed period. At the end of the contract the equipment will be yours, to use or sell.Some specialist providers of restaurant finance offer flexible options which are a hybrid of a hire purchase and operating lease product – giving you the option to rent initially, and then either return your equipment, buy it outright, continue renting, or convert to a hire-purchase contract where you’ll own the equipment at the end of the contract.
Meanwhile for your IT, telecoms equipment and payment systems, an operating lease may be the best solution, allowing you to upgrade as newer technology becomes available.

Equipment finance for medical practices

As a medical, dental or veterinary practice, you need top-quality equipment in peak condition – but each piece of equipment represents a substantial investment. Equipment finance allows you to set up your practice and keep up to date with changes in best practice without taking a massive hit to your working capital.

Meanwhile, it’s vital that you have free cash available for your hefty operating expenses, especially staff costs, consumables and insurances.

There are specialist providers of medical equipment finance, who will help you finance everything from your practice fit-out, telecoms and IT equipment, to the delicate specialised machinery you use to treat your patients. You can arrange finance for a specific piece of equipment, or an ongoing facility that lets you purchase and upgrade equipment over time, as you need to.

You can expect to use several types of asset finance in your practice:

Operating leases for the IT and telecoms equipment you need to run your practice efficiently, and for high-tech equipment that may quickly become obsolete.
Hire purchase agreements for equipment with a medium-term lifespan, or for items like office and waiting room furniture.
Chattel mortgages for your practice fit-out, and for larger pieces of equipment with a longer lifespan and low risk of obsolescence.

Equipment finance for retail businesses

As the owner of a retail business, your main upfront cost is likely to be your store fit-out. First impressions are crucial, but custom shelving, premium fittings and interior decoration can be a substantial investment.

Meanwhile, you need enough free cash flow to keep your store stocked and cover ongoing costs such as wages, tax and insurance.

For your initial fit-out and later upgrades, a chattel loan may be the most suitable option, allowing you to spread the cost over an agreed loan period (typically up to five years).Lenders understand that most retail businesses are seasonal and will generally allow you to fix a repayment schedule that is tied to your anticipated cash flow.You may be able to fix the interest rate on your loan, so you’ll know exactly how much your repayments will be. Your regular payments will be lower if you opt to pay a final balloon payment, but that does mean you’ll pay more interest in total over the term of the loan.
For your IT, telecoms equipment and payment systems, an operating lease may be the best solution, allowing you to upgrade as newer technology becomes available.

Equipment finance for construction/mining businesses

If you operate in the mining or construction industry, you will can expect to pay hundreds of thousands of dollars for each heavy vehicle or piece of specialised equipment.

While these sums may exceed the loan limit for some equipment finance providers, there are others who specialise in providing finance to businesses in the mining, construction and earthmoving sectors.

These providers offer a full range of equipment finance products, including chattel mortgages, operating and finance leases and hire purchase. However, for high-value, heavy equipment, the most common financing choice is a chattel mortgage, where the asset is used as security for the loan.

With a heavy equipment chattel loan, you will generally be able to agree a term of up to seven years, and negotiate a flexible repayment schedule to suit your cash flow.

You’ll usually have the option of equal repayments across the full term of the loan, or to pay lower monthly amounts and a residual balloon payment at the end of the contract. (Note that the balloon payment option will mean you pay more interest in total).

You can usually also choose whether to pay a deposit (in cash, or by trading in another vehicle or piece of equipment) or to borrow the full cost of the asset.

Equipment finance for tradespeople

As a tradesperson, your tools and vehicles are the essence of your business. To deliver high quality work, you need quality equipment in peak condition, which means both up-front and ongoing investment in tools.

For lower-value, everyday tools that may need to be replaced regularly, some hardware chains offer trade accounts with short-term credit options.

For high-value power tools and other expensive pieces of equipment, you may opt for an asset loan or lease arrangement, depending on whether you wish to own the equipment from the outset, or have the option to return it and upgrade at the end of the period.

When it comes to your work vehicles, the finance market is highly competitive. Most dealers have their own finance company, and vehicle loans are commonly offered by both banks and fintech lenders. You will be able to choose between:

Vehicle finance (effectively a chattel mortgage) where you’ll take out a loan secured on the vehicle and repay it over an agreed period of time. You may be able to negotiate fixed or variable interest, and a repayment schedule to match your cash flow. The term is typically up to five years.
Hire purchase, where you’ll pay regular fixed payments for an agreed period (again, typically three to five years) and will own the vehicle at the end of the loan term. You will have to pay a deposit and will usually pay off the balance of the loan in regular instalments.
Leasing, where the finance company will buy the vehicle and lease it to you under either a finance or operating lease. At the end of the contract you’ll return the vehicle to the lender, or you may have the option to buy it under a finance lease.With an operating lease you may be able to take out a maintenance contract so that the lender will be responsible for servicing your vehicle – but be aware that they may impose mileage restrictions under an operating lease, which could restrict your ability to do business if you service customers across a wide area.

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