Equipment Finance Rates Comparison Australia

A chattel mortgage is a secured loan for vehicles or assets purchased primarily for business use. You own the asset through the entire loan term, but the lender maintains a claim on it in the event that you default on the loan. You can only sell it or upgrade the asset with approval from the lender.

Most lenders will allow you to structure your chattel mortgage repayments to suit your business cashflow, with monthly or quarterly repayment options available. 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 cost of the balloon payment if needed.

According to Lend proprietary data, 15% of small businesses opt for a chattel mortgage to buy vehicles, and the median loan amount is $50,000.

Chattel mortgage pros & cons

Pros

• Chattel mortgage interest rates are typically low relative to unsecured finance
• Flexible loan repayment terms to suit your cashflow
• Interest on the finance and depreciation of the asset may be tax deductible

Cons

• You can’t sell or update the equipment while it’s used as security for the loan
• Early payment fees may apply
• You’ll have to record the asset and the loan obligation on your balance sheet, which will reduce your general borrowing capacity

Read morea: Chattel mortgage vs lease vs hire purchase

A hire purchase or commercial hire purchase (CHP), is a ‘rent to own' finance agreement. It allows you to buy a piece of equipment over an agreed period of time. The lender (lessor) purchases the asset at your request, and your business hires it in return for regular repayments. Ownership of the asset is transferred to you after the residual or balloon payment is made.

Some hire purchase agreements may require an initial deposit, but you will often be able to negotiate the terms of the contract and arrange a repayment schedule that works with your cashflow. There’s usually a balloon payment at the end of the term.

Hire purchase pros & cons

Pros

• You own the equipment at the end of the loan period
• Flexible repayment terms
• You can claim a tax benefit on repayments

Cons

• You may have to pay a deposit
• Limited flexibility to sell or modify the asset without the lender’s approval
• You’re responsible for maintenance of the asset during the life of the loan, even though you don’t yet own it

A finance lease or capital lease is a commercial rental agreement whereby the lender (lessor) will purchase the equipment on your behalf and then rent it to you for an agreed period.

In return, you'll pay regular lease payments, with or without a balloon payment at the end. You won't own the asset during the agreement term, but will be responsible for maintenance, running costs, and repairing any damage.

At the end of the contract term, you will have three options.

1. Return the asset to the lender

2. Make an offer to buy the equipment from the lender

3. Lease the asset for another period, usually at a lower cost.

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

Finance lease pros & cons

Pros

• You have the option to buy the asset at the end of the term, or lease it for a further period at a low rent
• Repayments are fixed over the term of the lease
• Lease payments and GST on the asset(s) are tax deductible

Cons

• Limited flexibility to upgrade your equipment during the lease agreement and early termination fees usually apply
• You’ll be responsible for maintenance and running costs during the lease
• You’ll have to record your finance lease obligations as a liability on your balance sheet

With an operating lease the lender (lessor) will purchase the asset on your behalf and then rent it back to you 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.

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.

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 lease term, with a simple amendment to the contract and lease payments. Under some leases, the lender will upgrade your equipment automatically on agreed terms.

An operating lease is for assets with a short lifespan, like IT equipment, payment or telecommunications systems, etc.

Operating lease pros & cons

Pros

• You can upgrade your equipment during the lease term
• Maintenance and operating costs are included in the lease repayments
• You don’t have to record the purchase on your balance sheet

Cons

• You never own the asset but have paid to use it
• You have to renegotiate and renew the lease after the contract period is over if you want to keep using the equipment/assets
• You can’t claim a tax deduction for depreciation of the asset(s)

If you want ultimate flexibility, an unsecured business loan is a short-term finance option with no collateral. It can be used for any genuine business purpose, including buying equipment. However, it comes with higher interests to reflect the additional risk to the lender.

Consider an unsecured business loan if you want to buy a small piece of equipment with some money but want more flexibility in using the remaining funds. You can use an unsecured loan for any genuine business activity.

Unsecured business loan pros & cons

Pros

• Quick access to capital
• Minimal paperwork involved
• No collateral or security required

Cons

• Higher interest compared to secured equipment finance
• Borrowing amount may be limited
• Shorter loan terms

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 practices evolve.

A chattel mortgage or finance lease may be the most suitable option for high-value manufacturing equipment with a medium or long lifespan. Both options allow you to take possession of your equipment without a significant upfront 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.

You need quality equipment in peak condition as a medical, dental or veterinary practice. Equipment finance allows you to set up your practice and keep up to date with changes in your industry without taking a massive hit to your working capital.

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.

As a retail business owner, your main upfront cost will likely be your store fit-out. This could include custom shelving, new floors, premium fittings and interior decoration. A chattel loan may be the most suitable option for your initial fit-out and later upgrades. An operating lease may be the best solution for your IT, telecoms equipment and payment systems, allowing you to upgrade as newer technology becomes available.

Mining and construction equipment can cost hundreds of thousands, if not million, of dollars for each heavy vehicle or specialised equipment.

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

The most common financing choice for high-value, heavy equipment is a chattel mortgage, where the asset is used as security for the loan. 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. Rates on heavy, specialised machinery are generally higher.

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

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.

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 to a loan period of up to five years and a flexible repayment schedule tied to your anticipated income (especially if your cashflow is highly seasonal because of your location or type of cuisine). Most commercial cooking and restaurant equipment will have a medium-term lifespan and may be ideal for a hire purchase arrangement.

Typical interest rates on equipment finance can range between 7-20% p.a. It may be more for fit-outs or specialist purchases. Equipment finance can be more expensive than small business loans, especially secured bank loans.

Most equipment loans are secured against the machinery or equipment purchased. However, there are unsecured business loans you can take out to buy equipment or other assets that won’t be used as collateral for the finance. This is usually in the form of a term loan with regular payments over a fixed term.

You don’t normally need a deposit for most types of equipment finance as the equipment or machinery purchased is used as security. However, some hire purchase agreements may require to pay a deposit and then the rest of the loan balance as normal.

Yes, the interest portion of your equipment loan repayments (for a chattel mortgage) and asset(s) depreciation are generally tax deductible. For equipment rental and lease agreements, contractual payments are tax deductible as an operating expense but not depreciation since you don't own the asset(s). Tax benefits vary for a chattel mortgage, lease and hire purchase agreement. Speak to a broker or accountant about the best option for business.