Buying Plant Equipment: Which Finance Option Fits?

Chattel Mortgage vs Equipment Leasing: What Changes Your Monthly Cost

A chattel mortgage puts the equipment on your balance sheet from day one, while equipment leasing keeps it off until the lease ends. With a chattel mortgage, you own the excavator or medical scanner outright, claim the GST back immediately, and depreciate the full value. With a lease, you're renting with an option to buy, spreading the GST across lease payments, and the lender technically owns it until the final payment.

Consider a fabrication business in North Geelong replacing factory machinery worth $180,000. Using a chattel mortgage, they claim the $16,364 GST input tax credit in the first BAS, then depreciate the asset over its useful life. Monthly repayments sit around $3,200 over five years, and they own the machinery from the start. Switch to a finance lease for the same machinery, and the repayments might be $3,100 per month, but the GST gets claimed progressively with each payment, and ownership only transfers at the end if they pay the residual.

The difference isn't just paperwork. If you need to show strong asset backing for other lending, chattel mortgages strengthen your balance sheet. If you're managing cashflow tightly and want slightly lower repayments without the immediate ownership responsibility, leasing can work. Both structures let you finance equipment across pretty much any industry, from construction to hospitality to medical.

Balloon Payments: When a Residual Makes Sense for Your Upgrade Cycle

A balloon payment reduces your monthly cost by deferring part of the loan amount to the end of the term. You're not paying off the full value across those 60 months; instead, you might pay off 70% and leave a 30% residual due at the end.

In a scenario involving a Geelong landscaping contractor financing a $90,000 excavator, structuring a 30% balloon payment drops the monthly repayment from around $1,700 to $1,200. At the end of five years, they owe $27,000. If the excavator still holds trade-in value around that figure, they can sell or trade it, settle the balloon, and move into newer machinery without finding extra capital. If their revenue grows and they want to keep the excavator, they refinance the residual or pay it outright.

Balloon payments suit businesses that upgrade equipment regularly or operate in industries where technology moves fast. Medical practices replacing diagnostic equipment every few years, or civil contractors running truck loans on vehicles they'll trade before they wear out, often use residuals to preserve working capital. If you plan to run equipment into the ground and keep it for ten years, paying it off fully without a balloon avoids the lump sum at the end.

Hire Purchase vs Finance Lease: How GST Treatment Affects Your Cashflow

Hire purchase and finance lease sound similar, but the GST timing differs. With hire purchase, you claim the full GST upfront on the total loan amount, just like a chattel mortgage. With a finance lease, GST gets spread across each payment.

A commercial kitchen in Geelong's CBD financing $50,000 worth of hospitality equipment will see $4,545 in GST. Using hire purchase, that full credit hits the next BAS, improving cashflow immediately. Using a finance lease, they claim around $75 GST per month over the life of the lease. For a business with tight cashflow or seasonal revenue, getting the GST back upfront can matter more than shaving $50 off the monthly repayment.

The other consideration is how depreciation works. Hire purchase lets you depreciate the asset because you own it from the start. Finance leases keep the asset off your books until the lease ends and you exercise the purchase option. If your accountant is using depreciation to manage taxable income, that difference shows up in your annual position.

Tax Benefits and Depreciation: How Much You Can Write Off

Depreciation lets you write off the declining value of business equipment against your taxable income. The rate depends on the type of equipment and how the ATO classifies it, but most plant and machinery sits in pools that depreciate between 15% and 30% per year.

A medical practice in Newtown buying $120,000 of diagnostic equipment might depreciate it at 25% diminishing value. First year, that's a $30,000 deduction. Second year, it's $22,500 on the remaining balance. Over five years, they've written off most of the asset's value, reducing taxable income significantly while still owning the equipment outright.

Some businesses also access instant asset write-offs or temporary full expensing provisions, depending on current tax rules and their turnover. A business loan or equipment finance agreement doesn't change your eligibility for these deductions, but the structure matters. Own the asset through a chattel mortgage or hire purchase, and you control the depreciation. Lease it under an operating lease, and the lessor claims the depreciation while you claim the lease payments as an operating expense.

Vendor Finance and Dealer Finance: When the Seller Arranges the Deal

Vendor finance comes directly from the equipment supplier. You're buying a crane or a tractor, and the dealer offers to arrange the finance as part of the sale. It sounds convenient, but you're only seeing one lender's terms.

We regularly see businesses in Geelong's industrial precincts around Corio or North Shore comparing vendor finance offers against what they can access through a broker. The dealer might offer 6.5% over five years. A broker accessing multiple lenders might find 5.8% with better flexibility around early repayment or balloon options. On a $200,000 piece of construction equipment, that difference is around $150 per month, or $9,000 over the term.

Vendor finance works when the deal is genuinely tailored or the supplier has a relationship with a lender that offers better terms than the open market. More often, it's a convenience product priced for simplicity, not value. Running the numbers through a broker who accesses asset finance options from banks and lenders across Australia gives you a reference point before you commit.

Operating Lease: Keeping Equipment Off Your Balance Sheet

An operating lease is a rental agreement where you never intend to own the equipment. You use it, pay monthly, and return it at the end. The lender owns it, depreciates it, and takes the residual risk.

This structure suits businesses with short upgrade cycles or equipment that becomes obsolete quickly. A tech business leasing servers or an engineering firm leasing surveying equipment might operate on two or three-year cycles, returning the kit and upgrading without dealing with trade-ins or residual values.

The monthly cost is typically higher than a finance lease or chattel mortgage because the lender is pricing in the depreciation and the risk of getting the equipment back at the end. But you're not locking capital into an asset you'll replace soon, and the lease payments are fully deductible as an operating expense. If your business grows fast and your equipment needs change unpredictably, operating leases offer flexibility at a price.

Call one of our team or book an appointment at a time that works for you. We'll run the numbers on chattel mortgages, leasing, and hire purchase options across lenders, and show you exactly what each structure costs and delivers for your business.

Frequently Asked Questions