Many businesses consider whether new equipment, machinery or vehicles are required for their operations.
A construction company may need additional machinery. A trades business may require more vehicles. A transport operator may need to expand its fleet. Professional service businesses may need updated technology and equipment.
The challenge is that business assets often involve significant upfront costs.
Rather than paying the full purchase price upfront, some businesses consider finance options that spread payments over time. This may leave more cash available at the time of purchase, although repayments, interest, fees and other obligations will affect future cash flow.
Equipment and vehicle finance can involve different structures, ownership arrangements, security requirements, fees and end-of-term obligations.
Understanding the available finance options, lending requirements and common considerations may help businesses better understand the application process before entering into a finance arrangement.
Why Businesses Use Equipment and Vehicle Finance
Business assets may be used for day-to-day operations, service delivery, transport, production or administration.
Equipment and vehicle finance may allow a business to acquire or use eligible assets without paying the full purchase price upfront. Depending on the finance structure, the business may own the asset from the outset, acquire ownership after meeting agreed terms, or use the asset under a lease. Repayments are generally made over an agreed term, subject to the terms and conditions of the finance arrangement.
Businesses commonly use finance for:
- Cars and utes
- Commercial vehicles
- Trucks
- Excavators
- Earthmoving equipment
- Agricultural machinery
- Manufacturing equipment
- Medical equipment
- Technology and office equipment
The type of asset often influences the finance structure available.
What Is Equipment Finance?
Equipment finance refers to finance arrangements that may assist businesses in acquiring eligible equipment without paying the full purchase price upfront. Depending on the finance structure, ownership arrangements and security requirements may differ.
Depending on the finance structure, the equipment may be used as security for the finance arrangement, and the lender or financier may register a security interest over the asset.
Depending on lender policy, asset eligibility and the borrower’s circumstances, equipment-finance enquiries may relate to industries including:
- Construction
- Transport
- Agriculture
- Healthcare
- Manufacturing
- Professional services
Equipment finance may allow eligible asset costs to be repaid over an agreed term, subject to the finance structure, lender criteria, fees and contractual obligations.
Common Equipment and Vehicle Finance Structures
Depending on the lender, asset and business circumstances, finance options may include:
- An equipment or vehicle loan
- A chattel mortgage
- Commercial hire purchase
- A finance lease
- An operating lease or rental arrangement
These structures can differ in relation to asset ownership, security, residual or balloon payments, GST treatment, end-of-term obligations and early payout conditions.
The finance structures available will depend on lender criteria, the borrower’s circumstances, the asset being financed and the predominant purpose of the credit.
Taxation, GST, depreciation, accounting and asset-ownership implications should be discussed with a registered tax agent or suitably qualified accountant before entering into a finance arrangement.
Understanding Business Vehicle Finance
The regulatory treatment of a finance arrangement depends on factors including the borrower, the predominant purpose of the credit and the relevant legislation.
Where the statutory requirements are met, the National Credit Code may apply to credit provided wholly or predominantly for personal, domestic or household purposes and to certain credit relating to residential property investment.
Credit used wholly or predominantly for business purposes may be treated differently.
The classification and applicable requirements should be confirmed for the particular transaction.
Why Cash Flow Often Drives Finance Decisions
Many business owners focus on the purchase price of an asset.
The purchase price is one consideration, alongside available cash, future repayment obligations and operating expenses.
Using a large amount of cash to purchase equipment may affect:
- working capital
- business reserves
- funds available for operating expenses
- the timing of other business expenditure
By spreading payments over time, some businesses seek to retain cash for wages, suppliers, stock and other operating expenses. The business remains responsible for scheduled repayments and may wish to compare repayment obligations against different cash-flow scenarios. Those scenarios are illustrative and are not forecasts of future business performance.
The effects and obligations of business finance will vary between businesses and may include ongoing repayments, interest, fees, security requirements and eligibility criteria.
These factors help explain why some businesses compare paying upfront with entering into a finance arrangement.
Common Types of Business Borrowers
Equipment and vehicle finance may be available to different business structures, subject to lender criteria and the circumstances of the application.
These may include:
- Sole traders
- Partnerships
- Companies
- Trusts
Lenders may assess each structure differently.
Documentation requirements can also vary depending on the business entity and the lender’s policies.
What Lenders Usually Assess
When reviewing a finance application, lenders generally consider a range of factors.
Depending on the lender and finance structure, assessment factors may include:
- Business income
- Trading history
- Existing liabilities
- Credit history
- Business structure
- Asset type
- Cash flow position
Different lenders have different assessment criteria.
As a result, outcomes may vary between lending institutions.
The Importance of Trading History
Depending on the lender and finance structure, evidence of trading history may form part of the assessment process.
Trading history helps lenders understand how the business has operated over time.
Factors often reviewed include:
- Length of operation
- Revenue and trading patterns
- Industry experience
Some lenders may consider newer businesses, while others may require longer trading histories.
Requirements vary depending on the lender and the finance structure being considered.
Understanding Business Credit Profiles
Credit history can play an important role in finance assessments.
Depending on the lender, this may include reviewing:
- Commercial credit records
- Existing finance commitments
- Repayment history
- Credit enquiries
- Defaults or adverse listings
Directors and guarantors may also be assessed in some circumstances. Credit checks, personal information and director or guarantor enquiries are subject to applicable consent, privacy requirements and lender processes.
Accurate financial records and information about existing financial commitments may assist lenders when assessing a finance application.
New Assets Versus Used Assets
When purchasing a used vehicle or other business asset, businesses may consider searching the Personal Property Securities Register to identify registered security interests.
A motor-vehicle PPSR search generally requires the correct VIN or, where applicable, chassis number. Where both are available, the VIN should generally be used.
For a vehicle purchase, PPSR guidance recommends carrying out the search on the day of purchase or the day before, using the correct identifying details for the vehicle.
Businesses should obtain legal advice where the result is unclear or a security interest is identified.
Deposits and Contributions
Not every finance arrangement requires a deposit.
However, some lenders may request a borrower contribution depending on:
- Asset type
- Credit profile
- Business circumstances
- Loan amount
Where a deposit is required, it may influence the overall finance structure and repayment calculations.
The Role of Asset Value
The value of the equipment or vehicle being purchased is often an important part of the lender’s assessment.
Lenders may consider:
- Purchase price
- Market value
- Asset condition
- Asset eligibility under the lender’s policy
The asset itself may form part of the lender’s security position depending on the finance arrangement.
Operational Reasons for Acquiring Equipment
Businesses may acquire equipment for a range of operational reasons, including replacing existing assets, expanding capacity or supporting future business activities.
Examples may include:
- replacing an existing asset
- increasing operational capacity
- adding equipment for a new service
- meeting transport or production requirements
Businesses may wish to assess expected asset use, repayment obligations, operating costs and cash-flow assumptions before proceeding.
The purchase of additional equipment does not automatically result in increased revenue or business performance.
Businesses may wish to compare repayment obligations and operating costs with the financial information available to them.
Understanding Total Finance Costs
When reviewing finance options, business owners often focus on repayments.
Repayments are important, but they are only one part of the overall picture.
Other considerations may include:
- Interest costs
- Fees and charges
- Loan term
- Asset ownership arrangements
- Early payout conditions
Businesses may compare interest, fees, repayment structures, ownership arrangements and end-of-term obligations when reviewing available finance options.
Planning Before Applying
Lenders may request financial, business, identification and asset information as part of an application.
Before applying, businesses may choose to gather:
- Financial statements
- Business bank statements
- Tax returns
- Asset details
- Identification documents
- Existing finance information
Applicants should provide complete and accurate information requested by the lender or broker. The lender will assess the application in accordance with its policies and criteria.
Questions Worth Asking Before Financing Equipment
Before entering a finance arrangement, business owners may wish to consider:
- How will the asset be used?
- What impact will repayments have on cash flow?
- How long is the asset expected to be used by the business?
- What are the repayments, fees, ownership arrangements and end-of-term obligations under each available structure?
These questions may help businesses identify information to discuss with their broker, accountant, legal adviser and lender.
Understanding Your Options Before Committing
Equipment and vehicle finance may allow eligible businesses to acquire or use assets without paying the full purchase price upfront.
It also creates repayment obligations and may involve interest, fees, security interests, ownership conditions and end-of-term requirements.
Relevant considerations may include cash flow, repayment obligations, lender criteria, asset eligibility, ownership arrangements and total finance costs.
Understanding these factors may help businesses better understand the application process, finance costs and ongoing obligations before entering into a finance arrangement.
Contact FinanceCorp on 1300 410 784 or admin@financecorp.com.au to discuss an equipment or vehicle finance enquiry, lender requirements and available options from the FinanceCorp lender panel. Available structures, terms and application outcomes depend on the borrower, credit purpose, asset eligibility, lender or financier policies and assessment.
FinanceCorp provides credit assistance under Australian Credit Licence 395037 in relation to credit activities regulated by the National Credit Act. The regulatory treatment of a finance arrangement depends on matters including the borrower and the predominant purpose of the credit. Commercial finance may be subject to different requirements.
Important Information
This article provides general information for educational purposes only. It does not take into account your objectives, financial situation, needs, business circumstances, borrowing requirements or commercial objectives. It is not a recommendation to acquire equipment or vehicles, enter into a particular finance structure or apply to a particular lender or financier for any product.
FinanceCorp provides credit assistance under Australian Credit Licence 395037 in relation to credit activities regulated by the National Credit Act. The regulatory treatment of a finance arrangement depends on matters including the borrower and the predominant purpose of the credit. Commercial finance may be subject to different requirements. Independent legal advice should be obtained where the classification or legal effect of an arrangement is unclear.
Available lenders, products and finance structures depend on broker accreditation, lender-panel access, the credit purpose, asset eligibility, information provided, lender policy and the borrower’s circumstances. FinanceCorp does not compare every lender, financier or finance product in the market.
Information about taxation, GST, depreciation, accounting treatment, ownership, security interests and the PPSR is general only. Seek assistance from a registered tax agent, suitably qualified accountant or legal professional regarding these matters.
References to cash flow, working capital, productivity, revenue, growth, operational efficiency or other commercial outcomes are general only and are not predictions or guarantees. Examples and scenarios are illustrative and should not be relied upon as an indication of approval, eligibility, borrowing capacity, business performance or future lending outcomes.
All finance is subject to applicable enquiries, documentation, lender or financier assessment, approval, terms, conditions, fees and charges.