Business Equipment Finance

What is equipment finance, and how does it work?

Author - Tom Whitworth
November 24, 2020
Business Equipment Finance
Author - Tom Whitworth
November 24, 2020

Business Equipment Finance is the umbrella term for the use of external finance or credit to acquire a piece of equipment for a business. This type of finance is typically used to purchase or borrow a physical or hard asset, such as a vehicle, a piece of machinery or a large business appliance – such as a commercial cooktop in a restaurant.

Businesses commonly use Equipment Financing in the following situations:

  • They need expensive equipment but either a) cannot or b) do not want to purchase the equipment up-front
  • They need to replace their equipment/assets frequently or as new technology is released
  • They want to use their cash liquidity to support their business’s working capital AND cash flow
  • The most common types of Business Equipment Finance include Chattel Mortgages, Equipment Loans and Finance Leases:

Chattel Mortgage
A “chattel” is a “portable” asset (basically, anything that is not property/real estate). Taking on a Chattel Mortgage means that you own the equipment from the beginning of the term of the facility. Only the interest component of the lease payments are tax-deductible with a chattel mortgage, however, depreciation deductions may also be available.

Equipment Loan
A standard equipment loan allows you to borrow up to 100% of the cost of the equipment with fixed and standard repayments. The equipment that is being financed is generally the only security required for the loan.

Finance Lease
A finance lease is a form of a rental agreement because the vendor owns the asset. At the end of the lease you have the option of purchasing the asset (for a residual amount agreed upfront), trading in the asset for new equipment or simply terminating the lease.

How does Business Equipment Finance work?
Most equipment finance organisations will normally finance the initial purchase of the piece of equipment, and structure repayments over a 1 – 5 year period Most lenders also prefer to determine the finance term of Business Equipment Finance based upon the Asset’s lifespan.

Typically, to acquire new business equipment or assets using business equipment finance will require the following steps:

  • Apply to and be approved by your bank, equipment vendor or non-bank lender
  • In the case of a Lender, Funds are transferred from the lender to the vendor, with the client not being involved in the transfer of funds.
  • The vendor then releases the asset to the client.
  • The client either repays the debt finance or pays the ongoing lease until the end of the term.

Example: A Restaurant is looking to acquire a new commercial cooktop. With normal usage and normal wear-and-tear, the cooktop will have a lifespan of approximately 5 years, before the Restaurant would need to replace it. To minimise the effect on the restaurant’s cash flow, and ensure serviceability of the finance, the lender may choose to finance the cooktop over 3 – 5 years to better suit the tangible life of the asset.

Once the term of the Equipment Finance has been determined, additional options such as Balloon payments are decided upon.

Important to know
The purchase of an asset or equipment for business use is known as “Capital Expenditure” or “CapEx”.

However, the ongoing cost of running that product or system is known as “Operating Expenditure” or “OpEx”.

Balloon payments are the repayment of the outstanding principal sum, made at the end of a loan period. Balloon payments are popular because they reduce the weekly/monthly repayments.

What is required to apply for Business Equipment Finance?
The application process differs greatly between traditional banks, non-bank lenders (such as fintech, alternative lenders and online lenders) and vendors.

Most banks in Australia require the following:

  • Assets and Liabilities statement
  • Financial statements
  • Fully documented application (business information & Directors information)
  • Payment of valuation and registration costs for Property Security (Security is typically taken against the asset being purchased):

The application process with traditional banks and financial institutions typically takes between 5 and 40 business days. With the many different types of non-bank lenders, the average application for a Business Equipment Finance will require the following:

  • Copies of business banking statements (normally for the last 6 to 12 months)
  • Copies of commercial invoices and asset information
  • Online application (business information & Directors information)
  • Personal Guarantee (Unsecured) or Property Security (Normally secured against the Asset/Equipment) – this varies from lender-to-lender.

Equipment Vendors typically offer Finance Leases, and may require the following:

  • Signed Lease Agreement/Contract
  • Credit Checks
  • Trade References/Accountant Reference
  • Financial Statements (normally for Leases on Equipment greater than $30,000)

What is equipment finance, and what are the alternatives?

Because of it’s revolving, on-demand nature, the closest type of credit facility to a Line of Credit is a Credit Card. Typically, Credit Cards have a much higher interest rate and there may be additional costs to access cash or pay certain types of suppliers or vendors.

Business Loan VS Business Equipment Finance
A Business Loan is a lump sum of cash that is deposited into your business bank account. Because it’s a lump sum, you pay interest until the entire amount is repaid, and typically business loans are fully amortized.

A Business Loan is typically issued for a single, specific purpose, such as funding a large asset or piece of capital expenditure, or an ongoing set of charges such as business expansion, renovations, or ongoing Marketing campaigns.

Always consider if a Business Loan will be the best option for your business. While the cash injection of a Business Loan might sound more appealing, the term will typically be much shorter, meaning higher, more frequent repayments over a smaller timeframe. Add to this that the annualized percentage rate will typically be higher, and you may end up spending more than required to obtain your new business asset.


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