What is Equipment Finance?

Equipment can be purchased outright for cash or alternatively financed. Equipment finance offers different options to purchase or acquire the right to use the equipment and generally uses the equipment as collateral.

The different types of equipment finance (also known as asset finance) differ mainly on how ownership transfers (if at all). Sometimes the funder owns the equipment and you ‘rent’ or ‘lease’ it over a term. At some stage you may have the ability to own it near the end of the term of the agreement; it all depends on the contractual terms.

Deciding between these options requires careful consideration of cash flow, as well as whether you actually want to own the asset, and importantly there are tax and VAT implications.

RENTALS OR LEASE

An operating lease (or rental) is generally an agreement where you do not own the equipment or asset and pay a rental fee (generally monthly) for the use of the asset over a period. However, unlike an instalment sale agreement, you may not automatically own it at the end of the term. The flexibility of an operating lease (or rental agreement) allows for many options at the end of the rental term where you can continue renting, or return the equipment, or purchase the equipment.

Depending on the type of agreement, the leasing company may be responsible for maintenance, registration and insurance costs of the equipment. Normally, that is recovered in the rental amount but could also be shown as a separate cost. Remember to take this into account when comparing other finance options.

Typical assets that would qualify for finance under rental agreements are: Office Automation equipment, PABXs, computer equipment, security equipment, etc.

ADVANTAGES

No CAPEX approval required
Flexibility on term, upgrades, payment frequency
No deposits required
Operating expense
100% tax deductible
Quick to obtain loan

Disadvantages

Don’t own equipment
Can’t depreciate it
Asset not on balance sheet
Early termination can be expensive

INSTALMENT SALE

An Instalment agreement means a sale of property where the payment of the asset is made over an agreed period of time and on payment of the last instalment, the lender transfers ownership of the asset to the borrower. The structure of the payment takes many forms and can include balloon payments, payment holidays, upfront deposits etc. Generally, the borrower is required to maintain, service and insure the asset.
Typical assets that would qualify for instalment sale agreements are vehicles, agricultural equipment, earth moving equipment etc.

ADVANTAGES

You own the asset at the end
Flexibility to adjust repayment for your affordability
Interest is tax deductible
Can depreciate the asset

DISADVANTAGES

You may not want to own a depreciating asset
You need to insure, maintain and service the asset