Innovation and technology updates can mean what was “state of the art” at the time of purchase, is obsolete within a relatively short timeframe.
If the equipment you use depreciates quickly or requires updates the cost of staying current can be huge.
In these circumstances purchasing it outright could be an expensive mistake.
A better option may be to rent the equipment from a Financier using an Operating Lease.
When leasing, a business choosing the right product is critical.
Whilst there is a number available, the two most common are a Chattel Mortgage, or an Operating Lease.
The main way a Chattel Mortgage differs from a Operating Lease is ownership of the asset.
With a Chattel Mortgage
- You own the equipment
- The lender takes a charge of the equipment as security
- The borrowing is repaid over an agreed period
- Can include a balloon to reduce monthly payments
- When the loan is fully repaid, the Lender discharges their security
- Businesses registered for GST can claim the GST Input Tax Credit in the purchase price on their next Business Activity Statement
With an Operating Lease:
You “lease” or “hire” the asset from the Financier for fixed monthly repayments over a set period
At the end of the term, you have the option of:
- Handing the asset back to the financier with no more to pay
- Purchasing it for a pre-determined price
- Upgrading to the latest equipment with a new Finance Lease
An Operating Lease is ideal for equipment that depreciates quickly, or which uses technology that changes rapidly.
To the extent the equipment is used for business purposes:
- With a Chattel Mortgage, you can claim depreciation and interest as a business expense. Currently accelerated write off is also available with the governments Instant Asset Write off Scheme
- With an Operating Lease, you can generally claim the rental as a tax deduction
Many business owners use Equipment Finance to build a relationship with alternate Lenders (including major Banks) external to their core business and personal financing.
This is possible because the finance is secured by the asset being financed.
It can help avoid eroding core borrowing capacity and importantly, cross collateralisation of other business or personal assets to the borrowing. It still involves documentation etc, but once set up, can provide faster access to the equipment you need.
As I have outlined above there are several factors that need to be considered when Leasing business equipment.
The key to a successful outcome is planning and where needed asking questions.
If you have a need or would like to learn more don’t hesitate to give me a call.