1. Why businesses finance equipment
- Preserves cash reserves for wages, stock, tax obligations and unexpected costs.
- Allows repayments to be matched to the income the equipment generates over its working life.
- The asset itself usually acts as security, so property security is often not required.
- Fixed repayments can make budgeting and cash flow forecasting more predictable.
2. Common structures
- Chattel mortgage: the business owns the asset from the start and the lender takes a mortgage over it. Interest and depreciation may be tax-deductible, and GST-registered businesses may be able to claim the GST on the purchase price.
- Finance lease: the lender owns the asset and leases it to the business, usually with a residual value at the end of the term. Lease payments are generally tax-deductible for business use.
- Hire purchase: the lender owns the asset until the final payment is made, after which ownership passes to the business.
- Novated lease: a three-way agreement between employer, employee and financier, typically used for employee vehicles as part of a salary packaging arrangement.
3. When paying cash may be better
- The business has surplus cash well above its working capital needs.
- The asset is low value or has a short useful life.
- Finance costs would outweigh the benefit of keeping cash available.
4. Things to check before deciding
- The total cost of the finance, including interest, fees and any balloon or residual payment.
- Whether a balloon payment suits your future cash flow, as it reduces repayments but leaves a lump sum at the end.
- Current tax rules, such as depreciation and any instant asset write-off thresholds, which change over time. Speak with your accountant for advice specific to your business.
General information only. This article does not take into account your objectives, financial situation or needs, and is not financial, tax or legal advice. Lending criteria, rates and tax rules change over time. Speak with a qualified adviser and your accountant before making a decision.
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