How to Finance Plant Equipment and Protect Cash Flow

Plant equipment finance lets your business spread the cost of machinery over a set term, so you can keep working capital available for wages, materials and day-to-day expenses.

For a Surrey Hills business owner, the decision usually comes down to two questions. Should you lease or buy, and how should the repayments be structured? This article walks through both, with a worked example using an illustrative rate.

What Is Plant Equipment Finance and How Does It Work?

Plant equipment finance is a loan or lease used to acquire machinery for your business, where the equipment itself is usually the security for the debt. Some lenders may accept the equipment alone as security, although directors' guarantees or extra security may be required.

The lender pays the supplier, and you repay the lender over an agreed term. Terms vary by lender and asset. Our asset finance and equipment finance pages outline the structures available. The same approach is commonly used for heavy vehicle finance, trailer finance and other commercial vehicle finance, as well as excavators, forklifts and workshop machinery.

The main trade-off is that the lender holds security over the equipment. If repayments cannot be met, the lender may be able to repossess it, so the repayment needs to suit your cash flow.

Leasing vs Buying Plant Equipment: Which Suits Your Business?

Buying through a loan means you own the equipment and repay it over time, while a lease means the lender owns it and you pay to use it. Which suits you depends on how long you will use the machine and what you want to happen at the end of the term.

A loan generally suits equipment you plan to keep for its full working life. A lease can suit machinery that is replaced regularly or that loses usefulness quickly. When comparing leasing vs buying, ask what happens at the end of the term. Some leases require a final payment or the return of the asset, and a loan with a final balloon payment lowers your regular repayments but leaves a lump sum due at the end.

Tax treatment differs between a lease and a loan. Your accountant can tell you how each option applies to your business, so speak with them before you sign.

Example: Financing a $120,000 Machine Over Five Years

A $120,000 machine financed over five years at an illustrative 6.75% p.a. with no deposit and no balloon comes to about $2,362 a month. This example assumes a fixed rate for the full term. The actual rate you are offered will depend on your business, the equipment and the lender.

Consider a Surrey Hills landscaping and civil contractor who needs a mini excavator at this price. The owner is weighing up paying cash from the business account against financing it. Paying cash would use most of the available working capital, leaving little buffer for wages and materials in a slow month.

The owner chooses a five-year loan secured against the machine. The repayment of about $2,362 a month is set against the extra work the machine allows the business to take on, and the cash reserve stays intact for day-to-day costs. Assuming a fixed rate, the repayment stays the same over the term, whereas a variable-rate loan can change the repayment. The trade-off is that interest is paid over the term, so the machine costs more than its purchase price in total.

You can test your own figures with an asset finance calculator before talking to a lender, and adjust the term, deposit and balloon to see how the repayment changes.

What Do Lenders Look at When You Apply for Business Asset Finance?

Lenders mainly want to see that your business can afford the repayments and that the equipment holds its value as security. Requirements vary between lenders, so the assessment for a sole trader can look different from that of an established company.

Expect questions about how long you have been trading, your income and existing debts, and the age and condition of the equipment. New machinery from a dealer is often more straightforward to assess than an older item bought privately, and some lenders limit the age of equipment they will fund. A broker can help match your situation to lenders whose policies suit it, which can reduce the number of applications you make.

For larger purchases or those that need more than the equipment as security, a business loan or commercial loan may be worth comparing.

Can You Refinance an Existing Equipment Loan?

Yes, you can often refinance a business loan or equipment loan to change the lender, rate or repayment structure. Whether it is worthwhile depends on the costs of leaving your current loan.

Before going ahead with business refinancing, check for early exit fees, break costs on any fixed rate and any establishment fees on the new loan. A lower repayment achieved by stretching the term can mean you pay interest for longer. If you are also reviewing a home loan, our refinancing page covers that side of the picture.

A sensible first step is to compare your current repayment, remaining term and exit costs with what a new lender could offer, then decide whether the change is worth it.

Frequently Asked Questions