A loan, lease, rental or hybrid facility that allows your business to obtain assets to operate more efficiently.
There are three types of equipment finance available (1) Equipment Loan (2) Commercial Hire Purchase (3) Finance Lease and (4) Rental.
They are distinguished by the way in which the asset is acquired – by purchasing, leasing or renting the equipment.
Each one will have its advantages and disadvantages depending on your business goals and needs.
An equipment loan is a facility where your business purchases the equipment with loan funds from the lender who registers an interest over the equipment as security.
An equipment loan is for those who want to have ownership and don’t mind being left with the asset once the loan terms have been met.
The repayments represent a principal and interest portion and after the final repayment, the registered interest is cleared. The final repayment may be a preset larger lump sum known as a “balloon payment” or “residual value.”
This is the same facility as a chattel mortgage except it is for other equipment that may not have wheels like a “chattel” does.
A commercial hire purchase is a lease facility where your business leases the equipment from the lease provider (lessor) and then has the option to purchase the equipment at the end of the term at its fair market value.
The repayments are made up of principal and interest such that the equipment is paid down to its fair market value and the final repayment would represent exercising the purchase option.
This facility is similar to an equipment loan where a balloon payment would be equivalent to the fair market value purchase option. However with a commercial hire purchase the ownership of the equipment is at the granted end of the loan term rather than the start.
A finance lease is very similar to a commercial hire purchase except it does not have the option to purchase the equipment at the end of the loan term.
This means the lessor purchases the equipment, leases it to you and at the end of the loan term takes it back from you. In some instances they may offer to sell it to you instead.
A rental agreement where the equipment is rented to you by the lessor and returned to them at the end of the term. There is no option for ownership at the end of the lease agreement.
The operating lease repayment is just for using and maintaining the equipment but a finance lease repayment also includes paying down the principal.
This means the operating lease appears as an expense whereas a finance lease appears as a loan repayment. Under an operating lease the equipment is not an asset on your balance sheet but it is for a finance lease.
If you do not want to assume residual value risk and prefer to have all expenses wrapped into a single forecastable repayment this can be a quick deciding factor.
Anything your business needs to operate more efficiently or grow. If it has a serial on it and it has a relevant purpose we can finance it.
Some common examples are medical devices, gym equipment, plant machinery, chattels, trucks, specialist devices, IT equipment, computers and fit outs.
The tax implications depend on who holds ownership at the time of purchase and any intentions to take ownership at the end of the term.
For an equipment loan, as your business holds ownership at the start, the tax implications are:
Similarly for a commercial hire purchase and Finance Lease there is an intention to own the equipment at the end of term, you can still deduct interest and depreciation as well as claim the GST as an input tax credit.
Note for commercial hire purchase agreements entered into after 1 July 2012 the whole hire purchase repayment, including the principal component is subject to GST.
This means for a chattel mortgage and commercial hire purchase of the same amount, the commercial hire purchase would have higher repayments.
This can be a quick deciding factor between an equipment loan or commercial hire purchase. It is important to check with your Accountant so you can decide based on the overall benefits and costs.
For an Operating Lease Lease there is no ownership or set intention to own the equipment so the whole repayment can be tax deducted but no depreciation. GST is applicable to the whole repayment and it can be claimed as an input tax credit. Similarly for an operating lease there is definitely no intention to own the equipment so the same tax implications apply.
There are so many implications with each of these facilities and different ways they may apply. We’ve summarised them in a matrix below to make the comparison easier. We always recommend an introduction to your accountant so we can work together to provide recommendations backed up by professional tax advice.
Yes, and there are requirements regarding ABN/GST registration, depending on the equipment you are after and your business profile.
The more specialised the equipment the longer the you need to be registered for.
As a general rule of thumb you would need at least 6 months.
However an exception may apply if you have been in the industry for 5 years.
Generally a deposit is only mandatory if one or more of the below apply:
Depending on the lender and equipment being financed, the minimum you can borrow can be from $5,000 to $20,000.
If you meet the ABN/GST requirements there isn’t really a maximum and it would be on a case by case basis.
All lenders will require:
Then there are three classes of income verification you can provide:
Full documentation involves:
Semi low documentation:
Please note this list is client dependent and will be tailored to your unique scenario.
Due to the varying degree of documents to analyse, timeframes from when all required documents are received to approval are:
We encourage you to get in touch with us as early as possible. We have the in-house expertise to give you an accurate view of what the outcome would be, without even needing to apply (or marking your credit file).
This really depends on how specialised the equipment is and the level of income verification provided. The more specialised it is the less lenders are available which means the rates can be higher. On the flip side, the less specialised it is and the more income verification that is provided, the more lenders there are and the lower the rates can be, starting from 5% to 8% and going up to 15 – 18%.
Other costs on average would be:
As there can be significant analysis, enquiry and negotiation involved our fees do vary but we will let you know before beginning work what the maximum would be. The fees can be added to the loan so they are not an out of pocket expense.
A dealer is not a finance/credit expert like we are, nor do they have access to the selection of lenders like we have.
Typically a dealer will provide a quote from 1 – 2 lenders with 1 being their own.
We have access to over 20 lenders and this means it is very likely we can get you a better deal.
Keep in mind that rate is not the biggest driver of cost. The ability to make extra repayments or payout early can make a significant difference to what you actually pay overall.
To give you certainty and focus on car shopping we can get you a pre approval first. Then when you find the car it is no fuss price negotiation and quick delivery!
We have built relationships and established direct contacts within each lender so we can make escalation requests that are taken seriously.
Even more valuable is our experience with the process mechanics unique to each lender. For example a lender who can make real time gross settlement payments versus one who doesn’t can get you the equipment up to 2 business days faster.
We understand this makes all the difference at a critical time.