What’s an equipment loan?

Why asset finance?

Asset finance is a popular way to fund purchases and includes options such as equipment loans (also known as chattel mortgages), hire purchase and finance leases.

Demand for asset finance is highest among businesses with revenue of between $10m and $100m, with more than half using it to buy vehicles, equipment and machinery.

There are clear benefits for businesses that access asset finance. They preserve both their ready cash and their bank lines of credit. They also pay off the equipment over time, while it is generating revenue – effectively, it’s paying for itself. Business owners can also negotiate financing terms to better suit a seasonal or uneven cash flow.

Why consider an equipment loan specifically to fund cars and equipment? Chris Moldrich, CommBank General Manager Asset Finance, says equipment loans are by far the most popular asset financing option.

“While we offer hire purchase and line of credit facilities for those clients calling for it, the overwhelming majority of our business customers prefer a straightforward loan facility,” he says. “More than 90% of our current financing is through equipment loans. It allows the business to own and use the asset immediately. It effectively sits on their balance sheet and the business may be able to claim depreciation and interest for tax purposes. As the finance provider, we use the asset being purchased as security for the credit offered.”

An equipment loan has a similar structure to a fixed-rate traditional home loan or mortgage. Both fixed and variable pricing are generally available and repayments can often be structured around your seasonal cash flow.

Benefits of Equipment Loans

• You own the asset immediately and pay it off – freeing up valuable capital for other business needs.
• There’s no GST on loan repayments.
• You may be able to claim GST input tax credits .
• You may be able to claim expenses such as depreciation and interest payments as tax deductions, but professional tax advice should be obtained before including them as deductions in your tax return.
• Repayments can be structured over a range of periods, and tailored to your cashflow – usually two to five years.
• Interest rates are usually lower than unsecured loans and can be fixed or variable
• Repayments can be fixed at the same amount each month or be structured to fit your seasonal cash flow.
• You own the financed asset up-front, so it appears as an asset on your balance sheet as well as the finance showing as a liability.
• A balloon or residual payment can be set at the end of the term to lower your monthly payments. A balloon payment is a lump sum amount that’s not paid off until the end of your agreement. The higher the balloon payment, the lower your monthly repayments.
• Discounts may be available when you finance qualifying energy efficient equipment.

Using an equipment loan to grow your business

Marcus is a small business owner working in the film industry and employing up to five contractors. As COVID-19 outbreaks closed studios elsewhere in the world, it fuelled work for Australian-based screen production and demand for his services grew rapidly. Almost overnight, he needed to buy new vehicles, trucks and camera gear to meet demand, grow his business and generate more income.

Marcus’s financial provider recommended an equipment loan to ensure he could purchase and own the necessary equipment immediately without dipping into critical cash reserves. By using an equipment loan, the equipment being purchased could be used as security against the loan.

As the equipment cost more than $250,000, Marcus was offered his choice of a fixed or floating interest rate that moved with the market. He could switch over from a floating to a fixed rate down the track if needed. This gave him some flexibility in a changing economic environment. He was also offered a discounted rate for buying the latest, most energy-efficient equipment.

His financial provider first reminded him that to save money and get the best possible finance package, he needed to negotiate both the cost of the vehicle or equipment and the equipment finance charges separately. Both needed to be considered as separate items when comparing options. And he needed to confirm any additional fees and charges or any monthly fees for setting up the finance and managing it during the term.

Marcus negotiated a short two-year loan term, with a small balloon payment to be made at the end of this period. He preferred to pay higher monthly repayments while business was booming. After speaking with his tax adviser, he was able to claim GST input tax credits and, claim the depreciation and interest payments as a tax deduction.