Equipment finance explained

Key points

• Equipment finance helps you get machines, vehicles or tools without paying the full price upfront.
• The main types are loans (including chattel mortgages), leases and hire purchase.
• The big differences are who owns the equipment and what happens at the end.
• A balloon or residual lowers repayments but leaves a lump sum at the end.
• Tax treatment differs between types and countries, so ask your accountant.

What is equipment finance?

Equipment finance is money used to buy or use business equipment. That might be a truck, a tractor, a coffee machine, computers or medical gear. Often the equipment itself is the security for the finance.

Names and rules vary between countries and lenders. This guide uses general terms. Always check what a product means in your own lender's documents.

Equipment loan or chattel mortgage

With an equipment loan, you borrow money to buy the equipment and you own it from the start. The lender takes security over it until the loan is repaid. In some countries, this is called a chattel mortgage.

You make regular repayments of principal and interest. Once the loan is paid off, the lender's security is removed.

Lease

With a lease, the finance company owns the equipment and you pay to use it for a set time. At the end, you may be able to return it, keep using it, upgrade it or buy it, depending on the lease.

Leases can suit equipment that dates quickly, like technology, or that you plan to replace regularly.

Different kinds of lease

Some leases are mainly about using the equipment. Others are closer to buying it over time. The type of lease can change who is responsible for repairs and insurance, and how it is treated for tax.

Hire purchase

With hire purchase, the finance company buys the equipment and you hire it from them with regular payments. Once you make the final payment, ownership passes to you. It is a bit like a lease that is designed to end with you owning the item.

Balloon or residual payments

Many equipment loans and leases can include a balloon or residual. This is a lump sum due at the end. It makes the regular repayments smaller, but you still owe that amount, and you often pay more interest overall.

Before choosing a balloon, think about how you will pay it. Will you have the cash? Will you sell the equipment? Will you refinance? The balloon comparison tool shows how different balloon amounts change the numbers.

Comparing the options

When you compare, ask about:

• who owns the equipment during the term and at the end
• the repayment, the term and the total cost, including fees
• any balloon or residual amount
• who pays for repairs, servicing and insurance
• what happens if you want to upgrade or finish early

The equipment finance calculator compares paying cash with financing, using your own quote. The lease vs buy tool helps you compare leasing with buying.

Tax is different for each option

The way each type is treated for tax, and for GST or VAT where it applies, depends on the type of finance, your business and the country you are in. It can make a real difference to the true cost.

We do not give tax advice. Please ask your accountant how each option would work for your business before you decide.

Before you sign

• Get a written quote for the equipment and for the finance.
• Check the equipment's condition, warranty and expected life.
• Read the contract, including the end-of-term options.