The best type of equipment finance for your business

Jacob Overs

Monday, 18 May 2020

If your business has made it through COVID-19 so far, you’ve probably heard about the Instant Asset Write Off (IAWO) updates.

It’s just one of the Government’s initiatives to help Aussie SME’s stay afloat during the crisis, allowing them to instantly depreciate new and used assets (reducing their tax burden).

But before you go ahead and reap the benefits, which type of equipment finance is best for your business? Let’s dive in and find out.

What types of equipment finance can I choose from?

The type of equipment financing you choose will depend on what type of asset you’re looking to finance and how long you plan on keeping it. Our lending experts can help you find the best product for your needs.

The main types of equipment finance are:

  • Chattel mortgages
  • Equipment leases
  • Hire purchase agreements
  • Equipment rentals

Chattel Mortgage

A chattel mortgage can be used to finance vehicles or equipment, and allows the borrower to own their asset from the get go.

They make repayments over time (just like a regular mortgage) but there’s no need to put existing assets on the line for collateral. Instead, the equipment itself is secured against the chattel mortgage in case the borrower defaults.

Who it’s for: If you’re in an industry like construction, real estate, transportation or any other type of work that requires you to be on the road, a chattel mortgage could be a great fit for financing cars, trucks, tractors or other large pieces of machinery. A chattel mortgage allows you to own your vehicle or equipment outright—and because the physical asset doubles up as collateral, you won’t have to put any of your existing assets on the line.

Hire Purchase Agreement

As the name suggests, hire purchase agreements let you ‘hire’ a piece of equipment while paying it off. Hire purchase agreements are designed for businesses wanting to borrow any type of equipment (vehicles or machinery). One benefit of a hire purchase agreement is that repayments are often tax deductible.

While you don’t technically own your equipment in a hire purchase agreement, you have possession over it, so you can typically use it as if it were your own. Just make sure you check the terms and conditions of your loan to see whether there are any restrictions on how you use your equipment.

Many hire purchase agreements have a fixed repayment schedule, even if banks increase their interest rates. With so many moving parts in a business, this can provide a sense of relief with one less thing to worry about.

Who it’s for: Businesses who want to improve their cash flow or benefit from having predictable repayments. Note: hire purchase agreements are not as commonly used these days for a couple of reasons. Since changes made in 2012, customers must pay GST on interest and other fees associated with their hire purchase agreement. Also, with other types of equipment finance like a chattel mortgage, you can claim your asset’s depreciation. This is not possible with hire purchase agreements.

Equipment Lease

An equipment lease is similar to a hire purchase agreement in that you are able to use your equipment without technically owning it.

The difference? A hire purchase agreement results in owning the equipment, whereas an equipment lease typically requires you return your equipment at the end of the leasing period.

You might also have the following options, depending on the terms outlined in your contract:

  • Ability to purchase the equipment at its depreciated value
  • Extend the lease period, or
  • Return the equipment back to your lender

Who it’s for: An equipment lease is a solid option for businesses who need equipment for a short period of time, or are expecting their equipment to depreciate quickly. You won’t have to hang on to your equipment for long, and therefore can easily replace or upgrade it without being charged to do so.

Equipment Rental

Equipment rentals give you the flexibility to return, rent, purchase or upgrade your asset at the end of your lease term. This type of finance might suit you if you like to keep up-to-date with the latest (and rapidly changing) technology for your business.

Equipment rentals also free up working capital as you don’t need to fork out cash upfront to purchase your equipment—you can start reaping the benefits of using your new asset without putting your business in a compromised position.

Who it’s for: Equipment rentals are ideal for those who want to borrow assets temporarily and then return them, or want the flexibility to upgrade when they see fit.

If you want to take advantage of the IAWO updates, it’s important to purchase and install your equipment by the end of 2020. Also note: only eligible assets will be considered under the scheme.

We can help you get cash quickly (in as little as 24 hours) so that you don’t miss out on the opportunity. Get in touch with a lending expert today for all your equipment financing needs.

Jacob is the Director of Sales here at Valiant. He has a wealth of experience in helping small business owners with their everyday finance needs, and is our go-to guru for all things working capital.

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