Why would you finance the purchase of equipment?
Many businesses don’t have surplus cash laying around to purchase new equipment. The alternative is to finance the purchase. Financing can preserve your cash as well as being a tax effective method to acquire the new equipment or property. Please consult with your Accountant to determine if financing is right for you.
Generally speaking, the following assets could be purchased with equipment finance:
- Motor Vehicles and Trucks
- IT Equipment
- Office Equipment
- Factory equipment
- Earthmoving equipment and other yellow goods
So, what are the available financing methods to purchase new equipment. Which method is best for you will depend on your type of business, but could be as follows:
Hire Purchase (HP)
HP is a financing solution suitable for businesses wishing to purchase assets without paying the full value immediately. The customer pays an initial deposit, with the remainder of the balance and interest paid over a period of time. On completion, ownership of the asset transfers to the customer. The use of HP is particularly common in industries where expensive machinery is required, such as construction, manufacturing, plant hire, printing, road freight, transport, engineering and professional services.
The advantages of using HP
- HP allows companies to control and deploy assets without significant drain on working capital
- fixed-rate funding makes budgeting easy as the lessee has clear sight of future expenditures
- flexibility of repayment structuring is available to allow for seasonal business (e.g. one repayment a year), and to reduce monthly outlay by factoring in a ‘balloon’ payment at the end of the term
- prevents the risk of an asset’s value depreciating quickly and provides flexibility to enter into a new contract at the end of the original lease’s fixed term
- financing asset purchases can be more tax efficient than standard-term loans due to lease payments being booked as expenses. Although asset depreciation also provides tax benefits, the useable lifetime of the asset will vary depending on the asset and on local regulation
- high accessibility of financing for businesses due to the financing being secured with the leased asset and the asset being owned by the financing company
- in certain circumstances there is maintenance included within the terms of the agreement.
A chattel mortgage is a formal term that refers to a finance agreement that provides funds to purchase an asset and the finance provider accepts that financed asset as the security for the credit. While the vehicle or equipment is owned by the business, the lender uses the vehicle as security against the loan.
The advantages of a Chattel Mortgage
- flexible loan repayment periods
- the option to reduce the monthly repayments by setting a final balance (residual value or balloon)
- the potential to claim tax deductions if the car is being used for business purposes*
- the potential to claim Input Tax Credits if you are registered for GST*
- additional benefits (subject to lender selection) can include a fixed interest rate and monthly repayments for the duration of the loan
- repayments that can be aligned with your or your business’ cash flow.
*Please check with your accountant for eligibility
An equipment lease agreement is a contractual agreement where the lessor, who is the owner of the equipment, allows the lessee to use the equipment for a specified period in exchange for periodic payments. The subject of the lease may be vehicles, factory machines, or any other equipment. Once the lessor and lessee agree to the terms of the lease, the lessee gets the right to use the equipment and, in return, makes periodic payments during the duration of the lease. However, the lessor retains ownership of the equipment.
The advantages of leasing
- Less initial cash investment required.
- Lower monthly payments.
- Can have Tax benefits. (Consult with your Accountant)
- Fast turnaround time.
- Conserve your capital.
- Avoid technological obsolescence.
- Fixed payments
- Let the equipment pay for itself.