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Different Types of Equipment Finance: How It Works

Updated: Oct 1

We explain the different types of asset finance and why it could be a game-changer for your business.


Equipment finance for business

The Financial Challenges of Growing a Business


Many businesses find themselves in a tough spot: they have the potential to win larger contracts or take on more projects, but they lack the equipment or other resources to do so. Investing in new machinery, vehicles, technology, software, or other essential assets can open the door to new opportunities.


But the cost of acquiring these assets upfront can quickly deplete savings. Without the financial flexibility to adapt and grow, businesses often struggle to take that next step. This is where asset finance can provide a valuable solution, allowing companies to access the tools and resources they need without compromising their financial stability.


What is Asset Finance?


Asset finance is a versatile financial tool that enables businesses to acquire essential equipment, tools, or other high-value items by using credit. It offers businesses the flexibility to spread the cost of acquiring these assets over time, rather than paying the entire sum upfront.


An asset, in this context, refers to any physical resource a business needs to operate efficiently. Common examples of assets include:


  • Machinery

  • Vehicles

  • Office furniture

  • Factory fit-outs

  • Tools

  • Inventory

  • Buildings and land


Typically, the asset being purchased acts as collateral to secure the loan. This reduces the risk for lenders, as they have the right to repossess and sell the asset if the borrower defaults on their repayments. Additionally, businesses can also use existing assets as collateral to secure a line of credit, which can be used flexibly for various business purposes.


Different Types of Asset Finance


Businesses have different needs, which is why there are several asset finance options to choose from. Each one is designed to offer a solution for specific circumstances. Let’s explore the key types of asset finance available in Australia:


Hire Purchase


A hire purchase arrangement allows a business to hire an asset from a finance company for an agreed period. During this time, the business makes regular payments. At the end of the contract, once all payments have been made, the business has the option to purchase the asset outright by paying a small, nominal fee.

This option is ideal for businesses looking for a clear path to asset ownership without the immediate upfront cost.


Key features:


  • Regular payments over an agreed term.

  • Ownership can transfer to the business at the end of the agreement.

  • Typically suits long-term asset acquisition.


Finance Lease


With a finance lease, the finance company buys and owns the asset, while the business uses it for a specific period. The business pays fixed lease rentals throughout the term of the lease. At the end of the lease, there may be an option to purchase the asset, continue leasing it, or return it to the finance company. This may be an attractive option for businesses looking to access the latest equipment without committing to ownership.


Key features:


  • Fixed lease payments.

  • Option to buy, renew the lease, or return the asset at the end of the term.

  • Suitable for assets that may need regular upgrading, such as technology or vehicles.


Operating Lease


An operating lease is similar to a finance lease, but it typically involves shorter lease terms and fewer long-term commitments. Businesses pay to use an asset for an agreed-upon period, but at the end of the lease, the asset is usually returned. Businesses also have the option to renew the lease or buy the asset at its current market value. Operating leases are ideal for assets that depreciate quickly or have a shorter lifespan, such as IT equipment.


Key features:


  • Use the asset without long-term ownership commitments.

  • Flexible options at the end of the lease.

  • Best for short-term needs or rapidly depreciating assets.


Chattel Mortgage


A chattel mortgage allows a business to take immediate ownership of an asset while the lender holds a mortgage over it as security. The business makes regular repayments until the loan is fully repaid, at which point the lender removes the mortgage. This option may be suited to businesses that want to own the asset from day one while still spreading out payments.


Key features:


  • Immediate ownership of the asset.

  • Regular loan repayments.

  • Once the loan is fully repaid, the mortgage is discharged.


Novated Lease


A novated lease is a specific type of asset finance primarily used for vehicles. It involves an agreement between an employee, an employer, and the finance company. The employee leases a vehicle, and the employer takes responsibility for making lease payments, which are deducted from the employee’s pre-tax income. This arrangement provides tax benefits for employees and is an attractive option for businesses offering salary packaging.


Key features:


  • Primarily used for vehicles.

  • Lease payments are made through pre-tax salary deductions.

  • Provides tax benefits for employees.


How Asset Finance Can Benefit Your Business


Asset finance can offer several benefits that may support business growth and operational efficiency:


  1. Preserve Cash Flow: Rather than spending large amounts upfront, businesses can spread the cost over time, helping them preserve cash flow for other day-to-day operations or investments.

  2. Flexibility: With a range of finance options available, businesses can choose the most suitable arrangement based on their unique needs and circumstances.

  3. Tax Benefits: Certain asset finance options, such as novated leases or chattel mortgages, may provide tax advantages, allowing businesses to claim deductions on interest or depreciation.

  4. Access to the Latest Equipment: Leasing options enable businesses to regularly upgrade to new equipment or technology without the need for long-term ownership commitments.

  5. Easier Budgeting: Fixed monthly payments make it easier for businesses to manage their budgets and plan for the future.


 

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Is Asset Finance Right for Your Business?


Asset finance can be a game-changer for businesses that need essential equipment but don’t want to tie up their capital. When considering asset finance, it’s important to evaluate your business' needs, the types of assets required, and whether ownership or leasing is the best long-term strategy.


Want to know more? Talk with one of our business finance experts who can guide you through the process and help find the best solution tailored to your needs.


Call us on (02) 8313-8400 or request a call back.

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