A Guide to the Different Types of Equipment Finance: Lease, Hire Purchase, Chattel Mortgage and Operating Lease

Equipment finance offers a pathway to maintaining operational efficiency while mitigating financial stress. There are four main types of business equipment financing: lease, hire purchase, chattel mortgage, and operating lease.

When faced with many options, how do you find the right one for your business? Let’s explore the types of equipment and asset finance options available, along with their benefits.

What is Equipment Finance?

Equipment finance refers to the use of loans or leases to gain access to business equipment. Instead of making an outright purchase, businesses can leverage equipment and asset finance to obtain the necessary tools while spreading the payments over time.

Equipment and asset finance leases can be categorised into finance lease, hire purchase, chattel mortgage, and operating lease.

Benefits of Equipment Financing

Not only does equipment financing help conserve cash flow, but it also provides potential tax benefits and preserves capital for other critical investments. 

• Lower Upfront Costs: Begin using equipment without a large initial investment.
• Flexibility in Upgrading: Easily upgrade to newer models or technology as needed.
• Conserves Cash Flow: Maintain cash liquidity for other critical business expenses.
• Potential Tax Advantages: Lease payments may be deductible as a business expense.
• No Asset Obsolescence: Lessen concerns about equipment becoming outdated or losing value.
• Simplified Budgeting: Predictable monthly payments aid in financial planning and budgeting.

What Is a Finance Lease?

A financial lease is a type of equipment finance that allows business owners to lease necessary assets while maintaining the option to purchase them at the end of the lease term. Ideal for long-term, high-value assets like vehicles or machinery, finance leases often offer lower interest rates as businesses maintain the asset during the lease period.

The business has full use of the asset but is responsible for its maintenance, repairs, and associated costs. The asset is typically listed on the business’s balance sheet, and lease payments are generally tax-deductible. 

Finance Lease Pros and Cons

What Is Hire Purchase?

A commercial hire purchase agreement enables businesses to access equipment immediately while partitioning payments over time. Ownership is transferred once the final instalment is paid.

Businesses enter a contract to pay the asset’s cost in instalments. After completing payments, ownership is secured, allowing companies to build assets gradually.

Hire Purchase Pros and Cons

What Is A Chattel Mortgage Loan?

A chattel mortgage involves a business borrowing against the asset itself. Unlike other financing options, ownership transfers immediately while the business makes regular payments against the loan secured by the asset.

A chattel mortgage agreement is drawn up between the business and the lender, outlining the terms, repayment schedule, and interest rate. It can include a residual or balloon payment at the end.

Chattel Mortgage Pros and Cons

What Is an Operating Lease?

An operating lease involves renting equipment without any intention of ownership. Typically, these leases cover shorter periods and focus on using the asset rather than owning it.

Unlike capital leases, operating leases typically do not end with asset ownership and usually have lower monthly payments. This is typically chosen for shorter-term needs where frequent upgrades are needed.

Operating Lease Pros and Cons

How to Choose the Right Equipment Finance For Your Business

To select the right type of equipment finance, businesses must assess their immediate needs and long-term goals. Define the type and purpose of the business equipment you need. Consider these questions as you weigh your options:

• Are you acquiring additional equipment or replacing something existing?
• What specific brand or model do you require?
• Is the equipment you’re considering new, used, or refurbished?
• How frequently will this equipment be utilised—daily or seasonally?

Factor in additional costs related to maintaining and operating the asset, especially for purchases or finance leases where you’re responsible for upkeep.

Explore Your Finance Lease Options Today

Consulting with a business finance broker can provide valuable insights. Brokers assess your business’s unique circumstances, offering personalised advice and structuring finance solutions that align with your financial goals and cash flow.

Ready to drive your business to new heights? Contact Cabbage Capital to explore tailored financing solutions today!