Equipment finance is an important consideration for most small-to-medium businesses. Especially if your business produces a product or service, it usually requires some sort of machinery or equipment. For small service businesses, computers, printers and office furniture might be the largest equipment investments. For manufacturing or construction businesses, equipment is a major expense, making business this type of finance essential.
Here we look at some common ways to finance equipment for businesses in Australia.
On-balance sheet or off-balance sheet?
First, equipment finance falls into two broad categories: on-balance-sheet and off-balance-sheet. With on-balance-sheet finance, the business shows a liability for machinery, plant and equipment on the balance sheet. With off-balance-sheet finance, the liability for the asset doesn’t appear on the balance sheet of the business.
The reason for choosing to finance equipment off the balance sheet is to avoid increasing the liabilities of the business, which could hinder seeking other forms of finance. Recent changes to accounting practices mean that off-balance-sheet equipment financing is now less common. Equipment finance from Lumi can be classified as on-balance-sheet finance, but we suggest speaking to your accountant on how to record any type of finance in your financial statements.
Common forms of equipment finance in Australia
Operating lease: With this type of finance, you rent the equipment and then return it to the owner (lessor) when the lease expires with no additional financial obligations. The full payment amounts are tax-deductible and there is often an option to purchase the equipment for an agreed price or can request to continue the lease. With an operating lease, risks remain with the lessor. While the ownership stays with the lessor, businesses leasing equipment are required to list operating leases on their balance sheets as a result of changes to accounting standards in 2019.
Finance lease: With a finance lease (also called a capital lease), the user rents the equipment and has the option to purchase it at the end of the lease, usually with a balloon payment. The lessee is responsible for all the risks associated with the asset and has exclusive use of it. Finance leases are listed on the balance sheet as depreciating assets.
Commercial hire purchase: This type of finance is often used to acquire vehicles. With a commercial hire purchase, the business hires the equipment from the lender and pays a fixed monthly payment over the term. The lessor agrees to purchase the equipment on behalf of a business that hires it from them. At the end of the term of the hire purchase, when the total vehicle price and interest have been paid, the business takes ownership of the equipment. During the hire purchase period, the business (lessee) can deduct interest and depreciation costs on its tax return.
Chattel mortgage: This is the traditional term to describe business loans used to purchase vehicles, machinery and equipment where the equipment being financed serves as collateral for the loan. If the borrower is not able to make repayments, the lender can take the asset and sell it to recoup the loan amount. This is similar to a property mortgage, so once the borrower has repaid the loan, they own the asset outright. Since a chattel mortgage is secured by the asset purchased, there’s less risk for the lender, hence a lower interest rate than unsecured finance to purchase equipment.
Unsecured equipment finance:
With this type of finance, the asset purchased (or other assets) is not used as collateral for the loan. This type of finance usually is in the form of a business loan that has regular payments and a fixed term.
Low-doc equipment finance:
Low-doc equipment financing does not require full financial documentation (full doc), including business financial statements, such as the balance sheet, profit and loss and cash flow statements. The minimal documentation required by low-doc equipment finance lenders might include BAS statements, credit reports, and asset and liability statements. With less documentation, these equipment loans usually require some form of collateral such as residential property.
Common types of finance for equipment by industry
Manufacturing equipment finance:
Machinery and equipment for manufacturing include CNC machinery, conveyors, cranes, lathes and more. The high cost of manufacturing equipment makes it necessary for businesses to seek plant and equipment finance to operate.
Medical equipment finance:
Even small medical clinics need to invest large amounts in medical equipment – from diagnostic and monitoring equipment to exam and procedure tables – which can quickly add up. For this reason, medical practices seek medical equipment loans to fund their operations.
Commercial equipment finance:
This is a broad definition that can include many types of equipment loans, from retail fit-outs to kitchen equipment for restaurants and cafes. Whatever the industry, the costs of commercial equipment make it necessary for businesses to seek commercial equipment finance.
Writing off equipment costs
As a business expense, you can write off the cost of equipment. In the past, equipment had to be expensed over its useful life which would depend on the type of asset. This meant that only a portion of the asset cost could be written off over several years. In 2011, this changed with the instant asset write-off which allows you to write off the total cost of business assets in the year they were purchased, providing a substantial tax break. More recently, this has been changed to what’s called ‘temporary full expensing’ and now includes the ability to fully deduct the cost of improvements to existing eligible depreciating assets made during the financial year.
For more details, check out our Short Guide to the Instant Asset Write-Off.
Equipment finance solutions from Lumi
Lumi offers a range of unsecured and secured business finance options for purchasing equipment. As small business finance specialists, we tailor solutions to meet the unique requirement of each business.
With Lumi, you can complete a finance application in 5 minutes and receive an answer the same day without harming your credit score. Get the full details about Lumi equipment finance and find out how to apply.