There are different types of business loans available to suit a range of scenarios. Here are some common financing options.
An equipment loan
Taking out an equipment loan can be an effective way to finance business equipment purchases, especially if it’s important to you for the business to own the asset from the outset. Businesses can usually get a loan for the full cost of the goods (no upfront deposit) with the asset itself serving as security for the loan. Generally, the interest you pay plus the depreciation of the asset is tax deductible to the extent the asset is used in your business.
The advantage of a vehicle or equipment loan is that it doesn’t tie up all your funds and generally doesn’t require additional security, enabling you to use your available cash and credit lines to generate income. Ownership passes to you immediately and your bank registers a goods mortgage over the asset.
An equipment loan can be tailored to suit your business’ cash flow, with a range of repayment options. You can also choose to reduce the loan amount and the related finance costs by adding some equity through a deposit or trade-in.
A finance lease arrangement
Leasing also allows you to get the latest equipment and vehicles with no capital outlay. Your bank owns the asset and leases it to you for an agreed period. The rentals are structured with a residual value, and give you options at the end of the lease period. The lease payments may be claimed as a tax deduction, to the extent the asset is used in the business.
The advantage of having a residual value is that your monthly payments will be lower, placing less strain on your cash flow. However, if you want to eventually own the asset, you can make an offer to purchase (plus GST).
A hire purchase agreement
If you want to own the latest equipment and vehicles but preserve your available cash, then a Hire Purchase (HP) agreement might suit you. With an HP agreement, your bank buys the equipment you need and hires it to your business for an agreed period.
Like an equipment loan, an HP agreement doesn’t tie up available cash and generally doesn’t require additional security. Similar to the treatment under the equipment loan, depreciation of the asset and the interest portion of any lease repayment may be tax deductible. Please obtain your own independent tax advice.