28 Jun The Different Types of Equipment Finance
Equipment Finance is a type of business financing that allows companies to get significant capital to purchase or lease an equipment. It can apply to office necessities like computers, desks, and servers; as well as heavy types of machinery like tractors, backhoes or delivery trucks. It gives businesses the opportunity to use these physical assets for their operations, without having to pay for the full up-front price.
There are different types of equipment finance. Before you shop around reputable financing sources, learn about each type so you can pick the best one that fits your specific business equipment needs.
A chattel mortgage describes the financing arrangement where a borrower purchases a movable asset or property (chattel) by taking a loan from a lender. The chattel serves as security in case the borrower fails to pay the loan. It’s different from a typical mortgage, wherein the loan is taken against a fixed asset or property, like a land or a home.
On the other hand, the ownership of the property in a chattel mortgage is transferred to the borrower right after the purchase, much like all mortgages. This is different with secured loans, wherein the borrower cannot legally own the purchased asset unless the loan is paid-off. Many businesses who want to purchase equipment use a chattel mortgage.
Commercial Hire Purchase (CHP)
In this type of equipment finance, the lender agrees to purchase the property needed by the business. The lender will let the business hire the equipment for a fixed monthly repayment over a specific period of time. In a CHP, the ownership belongs to the lender throughout that contract term, even though the business is in possession of the property. Only after all the dues (including the interest) are paid will the business legally own the equipment.
Commercial Hire Purchase is good for businesses that account for GST payments, whether on cash or accrual basis, because you may be able to claim a tax deduction. It is also a good choice for businesses who want better cash flow.
Equipment leasing is ideal when purchasing an equipment is simply impractical. Businesses that don’t need equipment year-round benefit the most from this, as well as operations that require frequent equipment upgrades. Aside from the huge capital investment, the equipment will incur depreciation cost and can be difficult to resell.
Equipment lease works the same way as CHP, except that the business won’t get to take the equipment at the end of the lease contract. It also makes the cash flow better for the business, plus you get to take away a huge chunk on your capital expense.
Fully-maintained equipment lease
This is another type of equipment finance where the ownership of the property belongs to the lender or leaseholder. In a fully-maintained equipment lease, the lease provider provides financing to purchase an equipment, as well as the costs related to operating and owning it. It can include fuel costs, servicing, registration fees and other permits. This equipment financing is great for businesses that need vehicles, trucks and other motored equipment.
The business will lease the equipment for a fixed period of time and will do monthly repayments, which include a fixed residual fee. At the end of the lease term, the business should send the equipment to the lease provider.
For businesses with limited resources and unstable monthly revenues, rentals may be the best finance solution for your equipment needs. Similar to equipment lease, the property is bought by the financer. It will be then rented by the business for a given period of time. After which, the business can decide if it will hand back the equipment, continue to rent it by agreeing to another rent contract or buy the equipment.
The difference of equipment rentals from lease and CHP is being in a month-to-month type of agreement. After 30 days, changes could be made to the agreement by either party. The financer can raise the rental fee and the business can hand over the equipment and find another equipment rental. Different states have their own laws that govern rental agreements, but there is usually a notice period required before changes on agreements become effective.
Among the different types of equipment finance, a structured loan is probably the best for businesses in complex financial situations that other financing products can’t solve. A structured loan fills this void and provides financing depending on the business’ current performance. Lenders can offer structured loans to businesses with poor cash flow, bad credit history, and all of those that other lenders consider as high-risk or unqualified borrowers.
Structured loans mostly have high-interest rates to compensate for the high-risk that the lenders are taking. They also have higher monthly repayments and shorter loan-term.
In Australia, individuals or companies who are purchasing equipment for business purposes are entitled to tax deductions. Businesses should also consider this when choosing the type of equipment finance to get. Nevertheless, getting equipment financing is always a sound decision regardless of equipment your business needs and however big or small your business might be.