Equipment Finance (EF)
Equipment Finance is often also referred to as Asset Finance or simply Leasing.
There are 4 main products used for EF:
- Hire Purchase – the customer hires the equipment until they make the final payment, at which time ownership transfers into the client’s name. Interest and Depreciation are usually tax deductible.
- Chattel Mortgage –the customer owns the asset from the start. The lender takes a charge over the asset. Interest and Depreciation are usually tax deductible.
- Finance Lease – the asset is owned by the lender. The client is basically leasing it from the lender and does not take ownership. Rental payments are tax deductible, but not depreciation as the asset is not owned, but leased.
- Novated Lease – the asset is owned by the lender. Rental payments are made by the employer. Rental payments are usually tax deductible.
With all the above products the term is normally limited to 5 years.
Information required at outset
Generally same as business finance, but the asset type, model and age are most critical.
Typical Scenario – Equipment Finance
The business purchases a vehicle (truck, car, trailer) for income producing purposes for say $100,000.
Chattel Mortgage - $100,000 over 5 years.
Balloon Payment - $ 30,000
The Chattel Mortgage would then be paid with 60 loan repayments amortising $70,000 and a final balloon payment of $30,000. By opting for a $30,000 balloon payment, the borrower has reduced their monthly commitment.
As with a commercial HP, depreciation and interest are both usually tax deductible. Generally if the balloon is not to be funded from the usual cash flow of the business, as a rough rule of thumb it should roughly equate to the depreciated/future market value of the asset.
