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Equipment finance and how to compare it
Obtain essential business vehicles, plant and equipment by choosing a competitive finance option.
For some businesses, equipment and machinery is essential to ensure financial success. Whether it’s heavy machinery, specialised medical equipment or the latest IT device , equipment finance can provide access to funds, so your business can acquire the necessary equipment.
What is equipment finance and who offers it?
Equipment finance is designed to allow you access to funds to purchase essential specialised equipment for your business. Whether you’re looking to purchase a forklift to move goods in your warehouse, or specialist medical monitoring machines for your private practice, equipment finance can help.
A large number of banks and other financial institutions offer this type of lending, and there is a range of finance options you can choose. However, choosing the best approach for your business depends on a number of factors including your financial situation, taxation needs and budget.
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How does an equipment loan work?
Equipment finance gives you access to the important business equipment you need without having to pay for it upfront. Instead, you receive the funds you need from a bank or lender and then pay off the purchase over a set repayment period. In other words, you receive the benefits of ownership before you actually own the equipment.
However, there are several finance routes you can choose; for example, business loan, hire purchase, finance lease or novated lease. Read on to discover more about how each type of finance works.
What ways can I finance my business equipment?
- Commercial loan or equipment loan. This is probably the most familiar type of finance. With a secured loan, the asset you wish to buy is used as security for the loan. This means you own the item in question and can claim interest charges and depreciation of the asset as tax deductions.
- Hire purchase. A financier purchases an asset on your behalf and then you buy it from them in instalments. With this arrangement, the financier owns the asset until you have paid it off and ownership transfers to you.
- Finance lease. A finance lease involves a lender purchasing the asset you want and then renting it out to your business for an agreed period. You can choose flexible repayment terms to match your budget, while the rental payments you make are usually tax deductible.
- Novated lease. With a novated lease you enter into a finance lease, but instead of you making the repayments, your employer makes them out of your pre-tax income. This is a form of salary sacrificing.
How do I compare products that provide equipment finance?
- Find out the interest rate. The interest rate offered influences how much you pay over the life of the loan, so look for one that offers a low rate of interest. You also need to consider whether you want the security of a fixed rate or the possibility of saving that a variable interest rate offers.
- Compare the fees and charges. Whenever you sign up for a financial product, it pays to make sure you’re aware of all the fees and charges attached. Read all product information closely, so you know if the finance option you choose attracts an establishment fee, early repayment fee, etc.
- Establish if there are any taxation benefits. Equipment finance options are assessed differently when tax time rolls around. Each approach has potential tax benefits, so seek advice from your accountant to learn which one will suit you and your business best.
- What are the loan terms? How long can you take to pay off the asset? Terms typically range from 12 months to seven years, so look for equipment finance that offers a term suited to your financial situation.
- Are there flexible repayment options? How often can you make repayments? Look for a solution that lets you schedule your repayments in a way that suits your budget.
The pros and cons of equipment finance
- A range of options. If you are looking for equipment finance you can find options to suit a wide range of business needs and budgets.
- Keeps your business running. Equipment finance gives your business access to essential items you might not be able to afford upfront, which helps you remain competitive in the marketplace.
- Flexible repayments. Equipment finance allows you to tailor a repayment schedule to suit your budget.
- Too much choice. The range of finance options and potential tax benefits available can be hard to understand, so you may need help from your accountant to choose the best equipment finance solution.
What should I consider avoiding about equipment finance?
The main pitfall to avoid is taking on a financial agreement that you cannot afford to service. It’s important to consider how essential the equipment is before you commit to a purchase, and make sure you can make repayments on time.
Another common issue is that some people become confused by the array of equipment finance options available. Seeking assistance from your accountant is usually the best way to ensure you make the right choice.
What other questions should I ask?
- Which finance option should I choose? The right finance option for you is influenced by a whole range of factors, including your accounting method and approach to taxation, so seek help from your accountant to determine the best product for your needs.
- What fees and charges should I be aware of? Read product documents closely so you are aware of things like establishment, late payment and early repayment fees. It’s also a good idea to keep an eye out for ongoing monthly or annual fees.
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