Most businesses need equipment to earn income. It might be a ute for a tradie, an excavator for a civil contractor, a coffee machine for a café or imaging equipment for a clinic. Asset finance lets you spread the cost over time instead of paying for everything upfront.
The terms can be confusing, because people often use “equipment loan” to mean any of several different products. This guide explains the main options at a high level, so you can have a more confident conversation with your broker and your accountant.
Asset finance is for business purposes. If you’re buying a car mainly for personal use, a consumer car loan is a different product with different rules.
Chattel mortgage
A chattel mortgage is a loan to buy a vehicle or piece of equipment, with the asset itself used as security. “Chattel” is an old word for movable property.
- Ownership: your business owns the asset from the day you buy it.
- Security: the lender registers its interest over the asset until the loan is repaid.
- Repayments: usually fixed for the term, with the option of a balloon payment at the end.
Because you own the asset from the start, a chattel mortgage is commonly used by businesses that want the asset on their own books.
Hire purchase
With hire purchase, the financier buys the asset and you pay for it in instalments.
- Ownership: the financier owns the asset during the term. Ownership passes to you once the final payment is made.
- Repayments: regular instalments, sometimes with a final balloon payment.
Finance lease
With a finance lease, the financier buys the asset and leases it to your business for an agreed term.
- Ownership: the financier owns the asset. You use it and make regular lease payments.
- At the end: there is usually a residual value. Depending on the arrangement, you may pay the residual to keep the asset, refinance it, or return it.
Operating lease or rental
Some businesses simply rent equipment, often with maintenance included, and hand it back at the end. This can suit technology or equipment that dates quickly. As business.gov.au points out, leasing usually means lower regular costs and easier upgrades, but you don’t own the asset.
Ownership at a glance
| Chattel mortgage | Hire purchase | Finance lease | |
|---|---|---|---|
| Who owns it during the term | Your business | The financier | The financier |
| When you own it | From the start | After the final payment | Only if you pay the residual and take ownership |
| End of term | Loan repaid | Ownership transfers | Pay residual, refinance or return |
Balloon and residual payments
A balloon payment (called a residual on a lease) is a lump sum due at the end of the term. Setting one up lowers your regular repayments, which can help cash flow while the asset is earning its keep.
The trade-off is that you still owe that amount at the end, and you’ll pay interest on it for the whole term. A larger balloon generally means paying more interest overall.
Illustrative example only: a business finances a $60,000 truck with a $15,000 balloon. Its regular repayments are calculated on paying down $45,000 over the term, with $15,000 still owing at the end. The business then needs to pay that $15,000, refinance it, or sell or trade in the truck to cover it.
It’s worth thinking ahead about what the asset is likely to be worth when the balloon falls due, and how you’ll pay it.
A note from Jenny When a client is weighing up a balloon, I like to look at the end of the loan as closely as the start. If we can see how the final payment will be met, the lower repayments become a planning tool rather than a surprise later on.
GST and tax: speak to your accountant
The GST and income tax treatment of each option is different, and it depends on your business. This is one area where your accountant’s advice really matters.
In general terms, the Australian Taxation Office explains that:
- A GST-registered business may be able to claim GST credits on a business asset it buys, provided it has a tax invoice. The timing of that claim can differ between a chattel mortgage, hire purchase and a lease.
- A business that owns an asset used to earn income can generally claim a deduction for its decline in value (depreciation), and may be able to deduct the interest.
- With a lease, the business generally doesn’t own the asset, so the treatment is different again.
- Special limits can apply to cars.
How these rules apply to you will depend on whether you’re registered for GST, how you account for it, how much the asset is used for business, and your business structure. Please check with your accountant before you choose a product, and see ato.gov.au for the ATO’s general guidance.
What lenders look at
Asset finance applications vary from simple to detailed, depending on the amount and how long your business has been operating. Lenders commonly consider:
- Your business: how long it has traded, its ABN and GST registration, and its financial position.
- The asset: its type, age and value, and whether it’s from a dealer or a private seller.
- Your track record: credit history and how you’ve managed past finance.
- Documents: sometimes as little as ID and a tax invoice, and sometimes financial statements, tax returns or business activity statements.
Choosing the right structure
There isn’t one option that suits every business. The right choice depends on whether you want to own the asset, how you’d like to manage cash flow, what happens at the end of the term and the tax position your accountant recommends.
A broker can compare how different lenders treat your business and the asset, and lay out the repayments and end-of-term choices side by side so you can decide with your accountant.
The information in this guide is general in nature and doesn’t take your circumstances into account. Asset finance is for business purposes only and is subject to lender criteria. Seek advice from your accountant on GST and tax.
This information is general in nature and does not take into account your objectives, financial situation or needs. Lending criteria, terms, fees and charges apply and vary between lenders. Speak with us for advice about your circumstances.