How to Finance Plant and Equipment for Your Business

How Asset Finance Helps You Acquire Plant and Equipment

Asset finance allows you to acquire plant and equipment by using the asset itself as collateral, which means you can spread the cost over time without paying the full purchase price upfront. The structure you choose determines how much you pay each month, who owns the equipment at the end, and how the arrangement affects your tax position.

Consider a landscaping business on the Sunshine Coast needing a $95,000 excavator. Paying cash would drain the working capital needed for wages and materials during the wet season. Through a chattel mortgage, the business borrows the full amount, takes ownership immediately, claims GST input credits on the purchase, and repays the loan over five years with fixed monthly repayments. The depreciation on the excavator reduces taxable income each year, and at the end of the term, the business owns the equipment outright. The alternative would have been waiting another two years to save the cash, losing contracts that required excavation capability in the meantime.

Chattel Mortgage vs Hire Purchase: Which Structure Fits Your Business

A chattel mortgage gives you ownership of the equipment from day one, while hire purchase transfers ownership only after the final payment. Both structures allow you to claim depreciation and running costs, but the GST treatment differs.

With a chattel mortgage, you or your business takes ownership immediately. If you're registered for GST, you can claim the GST input credit in the next activity statement, reducing the effective cost. Monthly repayments cover the principal and interest, and you claim depreciation on the full purchase price each financial year. At the end of the loan term, you own the equipment with no further payments.

Hire purchase works differently. The lender owns the equipment until you make the final payment. You can't claim the GST input credit upfront because you're technically hiring the equipment. Instead, you claim GST on each repayment. You still claim depreciation, but ownership only transfers once the agreement ends. This structure suits businesses that want to defer the GST benefit or prefer not to hold the asset on their balance sheet during the loan term.

For a $120,000 truck purchased by a transport operator in Brisbane, a chattel mortgage means claiming around $10,909 GST credit immediately, reducing the amount financed to $109,091. With hire purchase, that GST is claimed gradually over the loan term. The monthly repayment difference is marginal, but the cashflow impact in the first quarter is significant. If you need that GST refund to fund other expenses, chattel mortgage is the better option. If you want to keep the liability off your balance sheet until the term ends, hire purchase might suit your accounting preferences.

Finance Lease and Operating Lease: When You Don't Need to Own

A finance lease or operating lease lets you use equipment without taking ownership, which can suit businesses that need to upgrade regularly or want to avoid obsolescence risk. The key difference is how each lease treats the residual value and what happens at the end of the term.

With a finance lease, you make fixed monthly payments over an agreed term, and at the end, you have three options: refinance the residual and keep using the equipment, return it to the lender, or sell it and settle the residual with the proceeds. The residual value is typically set between 10% and 40% of the original purchase price, depending on the term length. You claim the lease payments as a tax deduction, but you don't own the asset, so you don't claim depreciation.

An operating lease works similarly, but the residual is usually higher, and the expectation is that you'll return the equipment at the end. This structure suits technology equipment or vehicles where you want to upgrade every few years without the hassle of selling the old asset. The lender takes the risk on the residual value, and you simply hand back the equipment and start a new lease on the updated model.

A medical practice in Townsville upgraded to a $200,000 diagnostic imaging machine through an operating lease with a three-year term. The lease payments were fully deductible, and at the end of the term, the practice returned the machine and leased a newer model with improved imaging capability. The alternative would have been purchasing the equipment outright, then trying to sell a three-year-old machine in a limited market while funding the new purchase. The operating lease turned a lumpy capital expense into a predictable operating cost with a built-in upgrade cycle.

How Balloon Payments Reduce Monthly Repayments

A balloon payment is a lump sum due at the end of the loan term, and it reduces your monthly repayments by deferring part of the principal. The Australian Taxation Office sets maximum balloon payment amounts based on the loan term, and most lenders follow these guidelines.

For a five-year term, the balloon can be up to 40% of the loan amount. For a four-year term, it's 30%. The longer the term, the higher the allowable balloon. The immediate benefit is lower monthly repayments, which helps manage cashflow during the loan term. The downside is that you owe a large amount at the end, which you'll need to either pay in cash, refinance, or cover by selling the equipment.

Balloon payments make sense when you expect the equipment to hold its value, or when you plan to trade it in or sell it before the term ends. They're common with commercial vehicles and machinery that have a strong resale market. They're less suitable for technology equipment that depreciates quickly, because you might owe more than the equipment is worth at the end of the term.

Tax Benefits: Depreciation and Deductions

Depreciation reduces your taxable income by spreading the cost of the equipment over its effective life, and the structure you choose determines how you claim it. With a chattel mortgage or hire purchase, you own the asset and claim depreciation each year. With a lease, you claim the lease payments as an operating expense instead.

The ATO sets depreciation rates for different asset classes. A truck might depreciate over seven to eight years, while office equipment might depreciate over four to five years. You can use either the straight-line method, which spreads the deduction evenly, or the diminishing value method, which front-loads the deduction in the early years. Most businesses choose diminishing value because it delivers a larger deduction when the equipment is new and earning the most revenue.

Instant asset write-off rules have changed over the years, but when available, they allow you to claim the full cost of eligible equipment in the year you purchase it, rather than depreciating it over time. The threshold and eligibility rules vary, so it's worth confirming the current rules with your accountant before committing to a purchase. Even without instant write-off, the standard depreciation deductions still reduce your tax bill each year, which improves the effective cost of the equipment.

How Lenders Assess Your Application

Lenders assess asset finance applications by looking at your business financials, the equipment you're purchasing, and how the repayments fit within your cashflow. The equipment itself is the collateral, which means lenders are more focused on the asset's value and your ability to service the loan than they would be with an unsecured business loan.

You'll need to provide recent financial statements, usually the last two years of tax returns if you're an established business, or interim management accounts if you're newer. Lenders want to see that your revenue covers the proposed repayments with enough buffer to handle seasonal dips or unexpected expenses. They'll also look at your trading history, customer concentration, and whether you have other debt commitments.

The equipment you're purchasing matters too. Lenders prefer assets with a strong resale market, because if you default, they need to recover the outstanding balance by selling the equipment. A well-known brand of excavator or truck is easier to finance than a custom-built machine with limited buyers. The lender will typically require a deposit of 10% to 30%, though some will finance up to 100% of the purchase price if your business financials are strong and the asset is in high demand.

Vendor Finance vs Bank Finance: Which to Choose

Vendor finance comes from the dealer or manufacturer selling the equipment, while bank finance comes from a commercial lender. Vendor finance is often faster to arrange, because the dealer has an incentive to close the sale, and they may approve applications with less documentation. Bank finance typically offers more competitive interest rates, longer terms, and more flexible structures.

The dealer promoting vendor finance might quote a low interest rate, but you need to compare the total cost, not just the rate. Sometimes the purchase price is inflated to compensate for the low rate, or the term is shorter, which increases the monthly repayment. Vendor finance can still be the right choice if speed matters, if your business is too new for traditional bank finance, or if the dealer is offering a genuine discount to close the sale.

Bank finance through a broker gives you access to asset finance options from multiple lenders, which means you can compare rates, terms, and structures across the market. A broker can also structure the loan to align with your cashflow, such as seasonal payment arrangements for agricultural businesses or longer terms to reduce monthly commitments. If you're financing multiple assets at once, such as a truck and a trailer, a broker can package them into a single facility, which simplifies the paperwork and may improve the pricing.

How to Use Asset Finance Without Draining Working Capital

Preserving working capital is the main reason businesses choose asset finance over paying cash. The equipment generates revenue, and the loan repayments are funded from that revenue, which means the business can grow without tying up cash reserves in depreciating assets.

A hospitality business in Cairns needed to replace kitchen equipment worth $80,000 after an unexpected breakdown. Paying cash would have consumed the cash buffer needed to cover wages and stock during the quieter months. Instead, the business financed the equipment over four years with repayments of around $1,900 per month. The new equipment reduced energy costs and downtime, which offset part of the repayment, and the business kept $80,000 in the bank to manage seasonal cashflow and take advantage of a bulk-buying opportunity with a key supplier.

This approach works when the equipment either increases revenue or reduces operating costs by more than the finance repayment. If the equipment is a static asset that doesn't improve your financial position, you need to decide whether the tax benefits and working capital preservation justify the interest cost.

When to Refinance or Upgrade Existing Equipment

Refinancing existing equipment or upgrading mid-term makes sense when the equipment no longer meets your needs, or when you can access a lower interest rate that reduces your repayments. Some finance agreements include upgrade options that let you trade in the current asset and roll the outstanding balance into a new loan.

If your current loan is a chattel mortgage or hire purchase with a high interest rate, refinancing to a lower rate can cut the monthly repayment or shorten the term. You'll need to check whether your current lender charges early exit fees, and compare the cost of those fees against the benefit of the new rate. If the equipment still has several years of useful life and the rate difference is meaningful, refinancing can save thousands of dollars over the remaining term.

Upgrading mid-term suits businesses where the equipment's productivity or efficiency is falling behind. A construction company might trade a four-year-old excavator for a newer model with lower fuel consumption and better attachments. The lender settles the old loan, and you start a new agreement on the replacement equipment. The key is making sure the upgrade improves your revenue or reduces costs enough to justify the new loan and any additional outlay.

If the current asset is fully depreciated and still reliable, upgrading might not make financial sense. You're better off running the equipment until it becomes a maintenance burden, then financing the replacement when the time comes.

Call one of our team or book an appointment at a time that works for you to discuss how equipment finance can support your business needs without draining your working capital.

Frequently Asked Questions