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Loan Types
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Earthmoving equipment finance
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If you're ready to upgrade to the latest earthmoving equipment for your business, you'll need finance. Find out how to apply for earthmoving equipment finance and maximise your chances of being approved.
Earthmoving is a highly skilled industry, and good earthmoving equipment doesn't come cheap. Whether you're looking for a dozer, excavator, grader, scraper, skid-steer or tractor, chances are you won't be able to pay for the equipment outright. Luckily, earthmoving professionals have a range of earthmoving equipment finance options at their disposal.
With an increasing number of smaller and niche lenders coming on board to keep the big banks on their toes, it pays to compare your options to ensure you are getting the best finance deal for your circumstances.
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Compare your earthmoving equipment finance options
There are a number of options you can consider if you want to finance earthmoving equipment. These include:
Equipment loan
An equipment loan is similar to other types of business loans and, to some extent, similar to a mortgage over a residential property. After approving your application for finance, the lender will extend the amount of the loan to you, allowing you to purchase the equipment outright. From there, the amount of the loan will be repaid over a set loan term under conditions that have previously been agreed between yourself and the lender.
The term of an equipment loan is generally linked to the projected useful life of the earthmoving equipment itself and is typically between one and five years. An equipment loan is essentially an unsecured business loan, with only the earthmoving equipment itself as security for the loan. This means that you will not need to put up any additional assets as security for the loan, such as a residential property.
Since you are purchasing the earthmoving equipment outright you can claim the GST component of the purchase as a tax credit on your next business activity statement (BAS). In addition, interest components of your ongoing loan repayments are usually tax-deductible, provided the equipment is used to generate assessable income. See the table below for more information.
Asset lease
In an asset lease arrangement, the lender purchases the equipment and then leases it back to you at a set rate over a fixed period of time. At the end of that period you can choose to surrender the asset or purchase it outright by making a balloon or residual payment. Leasing assets has certain tax and financial implications. Since the equipment is not owned by your business it will not be listed as an asset on your balance sheet, nor will there be a corresponding loan listed as a liability. This type of arrangement could suit a business looking to keep its debt-to-assets ratio down or that, for whatever reason, does not want to have another liability on its books. See the table below for more information. Your accountant will be best placed to help you determine whether a leasing arrangement would be most advantageous for your business structure compared to a hire purchase or outright purchase arrangement.
Commercial hire purchase
In some ways, a commercial hire purchase is similar to an asset lease. In both, the lender purchases the equipment outright and then leases it back to you at a set fee for a predetermined amount of time. At the end of the commercial hire purchase term the equipment is yours and you retain full ownership of it without needing to make any balloon or residual payment. A commercial hire purchase arrangement typically has a term of between one and five years, with payments made monthly, quarterly or yearly.
While the two arrangements may appear similar, especially on a practical level while the payments are being made, equipment leased under a commercial hire purchase arrangement is treated very differently from a tax and financial point of view than equipment under an asset lease. See the table below for a more detailed look at the different finance arrangements.
Understanding the tax implications of your different finance options
An equipment loan, asset lease and commercial hire purchase all have different advantages and disadvantages, and all could be viable options depending on your circumstances. A major issue to consider is the tax implications of the different forms of finance. For example, some businesses may be keen for a large lump sum GST credit, while other businesses would benefit from making smaller GST payments over a longer period of time.
The tax and financial implications are summarised below. Speak to your accountant to understand which finance option offers would best suit your business.
| Equipment loan | Asset lease | Commercial hire purchase | |
|---|---|---|---|
| Tax deductible ongoing repayments | No | Yes | No |
| Tax deductible asset depreciation | Yes | No | Yes |
| Tax deductible interest payments | Yes | No | Yes |
| GST credit for full cost of purchase | Yes | No | Yes |
| GST credit for ongoing repayments | No | Yes | No |
Choosing between different finance options
Factors to consider when making your decision
When weighing up your equipment finance options, consider the following:
- Fees and interest rates. Unlike lenders offering residential mortgages, business lenders do not usually publish information on their commercial interest rates. Lenders have a great deal of leeway when it comes to setting interest rates for business loans and can vary their rates considerably depending on the borrower, the amount of the loan and other considerations. Similarly, the schedule of fees can vary from lender to lender. Ensure that you understand the full cost of the loan before entering into any agreement to purchase earthmoving equipment under an equipment loan, asset lease or commercial hire purchase arrangement.
- Tax implications. Consider the taxation effect of the purchase, both in terms of your normal business tax returns and GST as shown on your BAS. What works for one business may not be right for another, making it a good idea to consult with your accountant to determine the best tax and GST position for your individual circumstances when acquiring new assets.
- Asset and accounting implications. When purchasing earthmoving equipment outright with an equipment loan, the asset belongs to the business and is recorded as such on your balance sheet. This may not be the case with other finance options, including an asset lease, where the asset remains the property of the lender until the residual balloon payment has been made.
- Loan term. Ensure that the term of the loan lease arrangement does not exceed the projected useful life or the depreciation schedule of the asset.
- Flexibility. How flexible are the terms of the various finance options? Are you able to pay out the loan early if you wish to, or will you incur early exit fees? For asset lease or commercial hire purchase agreements, can you terminate the lease early and take full ownership of the equipment by paying out the residual amount at any time?
Applying for an earthmoving equipment loan
Basic information
When you first start the process of applying for an earthmoving equipment loan to update your business equipment, you will be asked a series of questions to determine your eligibility for finance. These questions will usually relate to:
- The industry you operate in, such as mining, transport, construction or earthmoving
- Your ABN
- Any credit defaults
- Whether you own your home, are renting, or paying off a mortgage
- Existing business or equipment loans
- Funds on hand to meet your business's ongoing running costs
- Whether the equipment will be purchased through a dealer, auction or privately
- The amount, description and purpose of the equipment
Progressing with the application
Once your basic eligibility has been determined, the lender will run a credit check on you to determine your credit history and score. The lender will consider your business experience and the financial status of the business and yourself as the business owner. You will be required to provide full financial information for both yourself and the business, including tax returns and bank statements for the last two years.
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