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Understanding Equipment Financing

For business owners, finding the right funding for essential business equipment is imperative to commercial success. This guide aims to help you understand equipment finance, its pros and cons, and factors to consider when making your decision. Equipment financing, also known as asset finance, enables businesses to acquire specific equipment, such as vehicles, machinery, or technology.

What is a Chattel Mortgage?

A chattel mortgage is the formal name for loans where the asset being financed serves as security for the loan. Essentially a secured equipment loan. Chattel mortgages offer the advantage of immediate ownership (compared to hire purchase agreements or equipment rentals). Allowing businesses to own the asset from the beginning while paying it off over the term of the loan. This can be beneficial for those seeking operational control. Typically, chattel mortgages come with lower interest rates than unsecured financing, given that the asset serves as collateral. However, it’s important to be cautious, as defaulting on repayments could lead to the loss of the asset.

Benefits of Equipment Financing

1. Streamlined Cash Flow: Spreading repayments over a term of 6 months up to 5 years means the business can retain essential working capital for other business purposes or investments. Regular repayments means there is not a large lump sum outlay when the asset is acquired, helping to smooth cash flow.
2. Tax Deduction: The interest expense associated with the loan may be tax deductible to the business. Always check with your tax advisor or financial planner regarding taxation advice. 
3. Low Fees: Equipment financing often comes with lower annual fees compared to alternative financing options. The fee advantage adds to the appeal of these financing arrangements, contributing to overall cost savings.
4. Balloon Payments: Some equipment financing agreements may involve a lump sum payment at the end of the term, known as balloon payments. By choosing a balloon payment, the regular repayments over the life of the loan are generally less. This can help defer a portion of the payment to the end of the loan term which may help make the regular repayments more affordable. However, these lump sum payments may pose a challenge for businesses, requiring careful planning to ensure affordability. It’s important to note that it may be possible to refinance balloon payments if required. 

Choosing the Right Equipment Finance

Consider the following questions:

• Ownership Preference: Do you want to retain ownership, or is flexibility more crucial? If immediate control and ownership of the equipment are crucial, a chattel mortgage, may be suitable. On the other hand, if you only require the asset for a short period of time before looking to upgrade, leasing or rental arrangements might better align with your needs.
• Repayment Affordability: Assessing your business’s financial capacity is crucial. Consider whether your future cash flow can accommodate potential lump sum balloon payments, or whether higher, consistent regular repayments suit your cash flow better. Keep in mind that extending the loan term means the regular repayments will be lower — however you’ll accumulate more interest over a longer term.
• Equipment Use Beyond Term: Contemplate the future relevance of the equipment. Evaluate whether the machinery, technology, or vehicles you’re financing will remain valuable and effective beyond the loan term. This consideration is especially important for businesses in rapidly evolving industries. Choosing a financing option that aligns with the expected lifespan and utility of the equipment ensures a more sustainable and cost-effective investment over time.

Comparing Equipment Finance Options

Consider key factors:

• Interest Rate: Compare rates for competitiveness.
• Fees: Watch out for application and ongoing fees.
• Tax Benefits: Assess potential tax advantages.
• Loan Term: Does a shorter term with higher monthly payments suit your best, or is a longer term with lower repayments better (keeping in mind that this option has a higher interest expense)?

Equipment Finance Checklist

As you embark on choosing the right equipment finance, consider the following points in this checklist:

• Ownership: Understand if you want to own the equipment at the end. Consider your business strategy and evaluate whether owning the equipment aligns with your long-term goals. Ownership provides control, but it also involves responsibilities such as maintenance costs.

• Repayment Capacity: Determine what level of repayment would be optimal for your business cash flow. You may like to consider a balloon payment to reduce the regular repayments and pay a lump sum at the end. Evaluate your business cash flow and financial projections to determine if balloon payments, if applicable, are manageable. Understanding the financial capacity to meet your repayments is crucial for avoiding potential strains on your business finances.

• Usefulness Beyond Term Consider whether the equipment will retain its value beyond the loan term. Examine the nature of the equipment and its expected lifespan. Assess whether the utility and value of the equipment will endure beyond the loan term, ensuring that your investment remains relevant and beneficial to your business operations.

• Interest Rates: Compare interest rates for competitiveness. Thoroughly compare interest rates offered by different lenders. Look beyond the surface, considering whether the rates are fixed or variable, and choose an option that aligns with your risk tolerance and preference for predictable repayments.

• Fees: compare fees such as application and ongoing fees. Examine the fine print for any application fees and ongoing charges associated with the equipment finance. Understanding the fee structure is essential for accurately calculating the total cost of the loan and avoiding any unforeseen financial burdens.

• Tax Benefits: Understand the tax implications of each financing option. Consult with your accountant to comprehend the tax implications. Different forms of financing may offer varying tax treatment.

• Loan Term: Balance term length with affordability. Consider the loan term in relation to your business’s financial capacity. While longer terms may offer lower monthly repayments, they also result in higher overall interest payments. Striking a balance between term length and affordability ensures a financing arrangement that suits your business’s unique financial circumstances.

Our comparison platform empowers you to make well-informed financial decisions regarding business equipment finance. Compare today.