How does equipment finance work?

Equipment finance helps you get a business asset working now and pay for it over time. Examples include a truck, an excavator, a coffee machine, medical equipment or IT hardware. In most cases the asset itself is the main security, so the lender is less reliant on property or personal assets than with other business lending.

If you are still deciding whether to pay cash, borrow or lease, start with buying equipment: cash, loan or lease. For a side-by-side of the two most common structures, read chattel mortgage vs finance lease. This article covers what happens once you decide to finance: how the structures work in practice, used assets, balloons, the finer GST and tax points, and what lenders check.

How equipment finance works

Most equipment finance follows the same basic pattern:

1. You choose the asset and get a quote or invoice from the supplier.
2. The lender assesses your business and the asset.
3. The lender pays the supplier, and you make regular repayments over a fixed term.
4. The lender holds security over the asset until you have paid what you owe.
5. At the end of the term you own the asset, return it, or pay a final lump sum, depending on the structure.

The main types

Structure	Who owns the asset during the term	What happens at the end
Chattel mortgage	Your business	Ownership stays with you once the loan and any balloon are paid
Finance lease	The financier	You may pay the residual, refinance it or return the asset, depending on the agreement
Operating lease	The financier	You usually return the asset, or renew or upgrade
Hire purchase	The financier, until the final instalment	Ownership passes to you when the final instalment is paid
Rent-to-own	The provider	You may be able to buy the asset under the agreement’s terms

Chattel mortgages, leases and rent-to-own are compared in the articles linked above. Hire purchase is the one they cover least. business.gov.au describes it as a contract to buy an item that usually involves a deposit and instalments plus interest, with ownership passing to you when you make the final payment. It describes a chattel mortgage as “similar to a hire-purchase agreement, although the business owns the asset from the start”. The difference in ownership changes the GST and tax treatment, which is covered below.

With an operating lease, the financier usually carries more of the risk on the asset’s future value. With rent-to-own, check exactly when, and whether, ownership passes to you.

New vs used equipment

You can finance used equipment as well as new. The differences are mostly about risk:

• Age limits. Some lenders cap how old an asset can be at the start or end of the term.
• Valuation. A private sale or older asset may need an inspection or independent valuation.
• Term. Older assets may be limited to shorter terms, which means higher repayments.
• Supplier. Buying from a dealer is usually simpler to document than a private sale, where the lender will want to check that no one else has a security interest over the asset.

business.gov.au notes you can often save money by buying second-hand equipment. It also suggests you check the quality and whether repairs are available locally.

Balloons and residuals

A balloon (called a residual on a lease) is a lump sum due at the end of the term. business.gov.au defines a balloon as “a final lump sum payment due on a loan agreement”.

Illustration only: on a $100,000 asset with a $30,000 balloon, your regular repayments pay off $70,000 of the amount financed, plus interest. You still owe $30,000 at the end. You will also pay interest on that $30,000 for the whole term, because it is not being paid down.

A balloon lowers your regular repayments. It does not lower the total cost. Before you choose one, work out whether the asset is likely to be worth at least the balloon amount when it falls due, and how you will pay it.

GST and tax points

The ATO sets these rules. Confirm how they apply to you with your accountant or registered tax agent.

GST

• Loans, including chattel mortgages. The ATO says lending money is a financial supply, and financial supplies “do not have GST in their price and GST credits can’t be claimed”. The asset you buy is a separate purchase.
• GST credits on the asset. The ATO says you can claim a GST credit if you intend to use the purchase solely or partly for your business, the price included GST, you provide or are liable to provide payment, and you have a tax invoice for purchases over $82.50. You can only claim the business portion.
• Hire purchase. For agreements entered into on or after 1 July 2012, the ATO says “all components of the supply made under the agreement are taxable”, including fees and charges. If you account for GST on a non-cash basis, you can claim the full GST credit in the tax period when you make the first payment or receive a tax invoice, whichever comes first. If you account on a cash basis, the ATO says you can claim the credits upfront, as one-eleventh of all components, including interest and fees.
• Leases. The ATO says lease agreements are generally subject to GST, and each payment is treated as a separate purchase in each tax period. If you pay a residual to buy the asset at the end, that is a separate transaction.

Depreciation, the write-off and how you finance

The ATO says the $20,000 instant asset write-off is permanent from 1 July 2026 for small businesses with an aggregated turnover of less than $10 million. The limit applies to each asset. Buying equipment: cash, loan or lease covers the eligibility rules. The finance structure you choose affects who can claim depreciation deductions:

• Only the holder claims. Only the holder of an asset can claim a deduction for its decline in value. The ATO says that “in most cases, the legal owner of a depreciating asset will be its holder”. With a chattel mortgage, your business owns the asset from the start.
• Hire purchase. The ATO treats a hire purchase agreement as a notional sale and loan. The hirer is regarded as the holder “provided it’s reasonably likely that they will actually acquire the asset”. The notional interest may be deductible to the extent the asset is used to produce assessable income.
• Leases. Under a lease, the financier owns the asset. Special rules apply to some leases, including luxury car leases, which the ATO treats as a notional sale and loan.
• Cars. A car limit caps the cost you can use to work out depreciation on a car. Check the ATO’s current figure.

What lenders assess

Lenders look at your business in the same way as for other loans. That includes time trading, cash flow, credit history for the business and directors, and your ATO position. Our guide to how lenders assess business loans covers these in detail. Equipment finance adds a few asset-specific checks:

• the type of asset and how easy it is to resell
• its age, condition and expected life compared with the loan term
• whether it is new, dealer-sold or a private sale
• any deposit or trade-in
• the size of any balloon compared with the asset’s likely future value
• whether the asset will earn income directly, such as a truck on a contract

Specialised or hard-to-resell equipment is higher risk for the lender. It may need a larger deposit, a shorter term or extra security.

Step by step

1. Decide whether you need to own the asset. If you would rather replace it every few years, a lease may suit you better than a purchase.
2. Get a written quote or tax invoice that shows the GST.
3. Ask your accountant or registered tax agent which structure suits your GST accounting and tax position, including whether the instant asset write-off applies.
4. Estimate a repayment you can comfortably afford. Try it with and without a balloon.
5. Gather your documents using the business loan documents checklist.
6. Compare equipment finance or vehicle and fleet finance options. Look at the total cost, not just the repayment.
7. Before you sign, read the end-of-term terms: balloon, residual, return conditions, and any early payout costs.

Important things to know

• The asset can be repossessed. business.gov.au notes that if you use a vehicle to secure a loan, it can be repossessed if you don’t make repayments. The same applies to other financed equipment.
• Credit history matters. business.gov.au notes you might not be approved for a lease if you have a bad credit history. Our bad credit guide explains your options.
• The asset may be worth less than you owe. Equipment often loses value faster than the loan is paid down, especially with a large balloon. If you need to sell early, the sale price may not clear the debt.
• Insurance is usually a condition. Most lenders require the asset to be insured for the term, which adds to your running costs.
• Tax rules change. The write-off thresholds and dates above are taken from the ATO as at the date this page was reviewed. Check the ATO page before you rely on them.