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What Financing Options Are Available For A Business?

Choosing smarter ways to finance the equipment for your business can benefit you in the long term and help to reduce the amount you spend on it.

No matter whether you’re starting as a self-employed or have an established business you’re going to need equipment to help run your operations. You will find there is a flexible range of equipment loan options available in the lending market.

The most popular asset finance loans include equipment loan and hire purchase.

Table of Contents

1. Equipment Loan/Chattel Mortgage

2. What types of equipment fall under an equipment loan?

3. Benefits of equipment loan

4. Things to consider

5. Hire purchase

6. Benefits of a hire purchase

7. Things to consider

8. What is a balloon payment?

9. What is the difference between residual payments and balloon payments?

10. Which equipment loan is suitable for your business?

Equipment Loan/Chattel Mortgage

Also known as a chattel mortgage, an equipment loan is most beneficial for businesses who want to claim full ownership of a particular asset funded by the lender.

Once established through the lender, a business can claim the GST on the initial purchase price of the equipment.

You may also be able to claim interest and depreciation costs, depending on the period of use for that equipment.

What types of equipment fall under an equipment loan?

  • Motor vehicles used for the business operations
  • Heavy machineries like tractors, delivery trucks or tow truck
  • Office equipment such as computers, laptops, printers, desks etc.
  • Medical and scientific equipment

Benefits of equipment loan

  • Interest rates are generally lower on unsecured loans
  • On your next Business activity statement(BAS) you claim the initial purchase price GST
  • All interest is tax-deductible
  • Able to claim depreciation on your tax return for your vehicle

Things to consider

  • If you’re unable to meet the repayments, your lender may be able to repossess your car or equipment
  • You can’t sell or dispose of the asset during the term agreement
  • Any balloon payment is not tax-deductible
  • Generally required to pay for any upfront costs such as stamp duty

Hire purchase

If you’re looking to preserve your available cash funds but need the latest equipment for your business, then a hire purchase agreement maybe the best option.

Your chosen lender can help to purchase the equipment you need and you’re able to hire it for an agreed period.

Similar to equipment loans you may be able to claim on tax for the depreciation of the asset and the interest portion of any lease repayments.

Benefits of a hire purchase

  • Payments may be claimed as a tax deduction for the rental period
  • Cost-effective for equipment that has a high depreciation rate such as computers. Able to return the equipment, when it meets its business purpose
  • Most suitable for IT equipment and payment systems
  • The vehicle hire can be tax deductible if it’s used for business operations

Things to consider

  • The lender can reclaim the asset if you are not able to make your repayments
  • The equipment cannot be sold or modified without the lender’s permission
  • A balloon payment can be utilised to help reduce monthly repayments, this amount will be paid at the end of the term as a lump sum

If you are not sure about anything, our team of experts is there to guide you through.

What is a balloon payment?

If you’re looking to reduce the number of expenses on your monthly cash flow, a balloon payment might be what you’re looking for.

A balloon payment is an amount that diverts a portion of your interest payments into an agreed-upon lump sum. That you will pay to your lender at the end of your loan term.

It’s important to remember that while a balloon payment reduces monthly repayments, they also affect the total interest paid across the term of the loan.

What is the difference between residual payments and balloon payments?

Most often you will probably hear the term residual payment. This term is similar to a balloon payment in the sense that you make a repayment at the end of the loan. The key difference is that residual payments are usually attached to car leases over car loans. The residual amount is what you will have to pay to own the car based on its current market value. Depending on the terms of your contract you have the option to purchase the vehicle or not.

As for a balloon payment, this is a fixed % of the total loan that must be paid at the end of the loan term.

Which equipment loan is suitable for your business?

Understanding how your business will be influenced by taking out an equipment loan will help to determine which solution is most suitable for your business operations.

Having a rough idea of when your equipment can generate income may help to determine the best way to make your repayments. In addition, assessing the depreciation rate of your asset can help you decide if an equipment loan or hire purchase agreement is suited for you.

For any queries regarding these types of loans, your Abacus Finance mortgage broker can help to assess your financial situation and provide a suitable recommendation for your business.

The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.