Equipment Finance Explained: Chattel Mortgage, Lease or Hire Purchase?

Whether it’s a new ute, a prime mover, an excavator or a commercial kitchen, equipment is often the biggest purchase a business makes. Paying cash can leave the business short when it needs money most. Ben Blacker, Managing Director of Blacker Consulting, spent years in automotive and asset finance before starting his consultancy, and he says the type of finance you choose matters as much as the rate.

“Equipment should pay for itself as it earns. The right structure lets it do that without tying up your working capital,” says Ben.

The Main Types of Equipment Finance

Chattel mortgage. The most common option for Australian businesses. You own the asset from day one, and the lender takes a mortgage over it as security. For GST registered businesses, the GST on the purchase price can generally be claimed in your next BAS, and interest and depreciation may be deductible. You can often choose a balloon payment at the end to lower the regular repayments.

Finance lease. The lender owns the asset and leases it to you for a fixed term. Lease payments are generally treated as a business expense. At the end of the term you can usually pay a residual amount to own it, refinance the residual, or trade it in.

Hire purchase. The lender buys the asset and you hire it from them, with ownership passing to you once the final payment is made. Less common than it used to be, but still a fit for some businesses.

Operating lease or rental. You pay to use the asset but never own it, and the lender takes on the risk of its value at the end. This suits equipment that dates quickly, such as technology, or fleets you want to replace on a regular cycle.

How to Choose

Ben suggests asking a few simple questions:

• Do you want to own the asset at the end, or replace it?
• How important is keeping monthly repayments low?
• Is your business registered for GST, and how does each option affect your tax position?
• How long will the asset be useful, and does the finance term match it?

“Always match the term of the finance to the working life of the asset. Paying off a truck for seven years when you’ll replace it in five is a common and costly mistake,” Ben explains.

Because the tax treatment differs between options, Ben always recommends checking with your accountant before you sign. The best structure for one business can be the wrong one for another.

What Lenders Look For

Equipment finance is usually easier to arrange than unsecured lending because the asset itself is the security. Lenders will still look at your trading history, cash flow, credit file and the type of asset. Well known, easy to resell equipment generally attracts better terms.

How Blacker Consulting Helps

Ben helps businesses in transport, construction, mining and beyond choose the right equipment finance structure, compare lenders and get approvals moving quickly. If you’re planning a purchase, talk to Ben before you sign with the dealer.