Top tips to finance machinery for your business

Chattel Mortgage or Hire Purchase: Which One Works for Machinery

A chattel mortgage lets you claim the full GST upfront and own the equipment from day one, while hire purchase spreads the GST across repayments and transfers ownership at the end. Both options give you fixed monthly repayments, but the GST treatment and timing of ownership differ.

Consider a Wagga contractor buying an excavator for $110,000 including GST. With a chattel mortgage, the business claims the $10,000 GST input credit immediately and finances $100,000. With hire purchase, the business finances the full $110,000 and claims GST incrementally on each repayment. If cashflow is tight at the start, hire purchase spreads the cost. If you want to maximise depreciation deductions from the first year, chattel mortgage delivers that.

The choice depends on whether you need the GST refund now or prefer smaller monthly commitments. Most manufacturers and agricultural businesses in the Riverina region choose chattel mortgage because it front-loads the tax benefits and reduces the loan amount. Service-based businesses sometimes prefer hire purchase to manage cashflow during the first year of using new equipment.

Balloon Payments Cut Monthly Costs but Create a Lump Sum Later

A balloon payment reduces your monthly repayments by deferring part of the loan amount to the end of the term. You can structure a balloon payment up to a certain percentage of the loan amount depending on the asset and term, and the business either pays the lump sum, refinances it, or sells the equipment to cover the balance.

In our experience, a grower purchasing a tractor might set a 30% balloon payment to keep monthly repayments lower during the planting and growing season, then pay the balloon from harvest income. The monthly repayment on a $90,000 loan over five years at current rates might be around $1,500 without a balloon, or closer to $1,150 with a $27,000 balloon. That $350 monthly difference can preserve working capital when you need it for other operating costs.

The risk is assuming the equipment will sell for enough to cover the balloon, or that cashflow will support refinancing. If you plan to trade the machinery in before the term ends, a balloon payment aligns with the upgrade cycle. If you plan to keep it long-term, paying it down fully avoids the refinancing step.

Finance Lease or Operating Lease: When You Don't Need to Own the Asset

A finance lease keeps the asset off your balance sheet and can include maintenance and servicing, while an operating lease is typically shorter and often used for equipment with a fast upgrade cycle like technology or vehicles. Neither option results in ownership unless you pay a residual at the end, but both offer fixed monthly costs and potential tax deductions.

A medical practice in Wagga might lease diagnostic equipment on a three-year operating lease, then upgrade to the latest model at the end without worrying about resale. The practice pays a fixed monthly fee, the lessor owns the equipment, and the repayments are fully deductible. At the end, the practice either returns the equipment, pays a residual to keep it, or enters a new lease.

Leasing works when the equipment becomes outdated quickly or when you want predictable costs without ownership responsibilities. It doesn't work as well for long-life assets like construction equipment or manufacturing machinery, where ownership and depreciation deliver more value.

Vendor Finance and Dealer Finance: Faster Approval but Less Flexibility

Vendor finance or dealer finance is arranged through the equipment supplier and can be approved quickly, but the interest rate is often higher and the terms less flexible than going through a broker who can access asset finance options from banks and lenders across Australia. The supplier wants to close the sale, so they offer finance as part of the deal.

We regularly see this with hospitality equipment and smaller office equipment purchases, where the business needs the equipment immediately and the dealer offers in-house finance at the point of sale. The approval might take a few hours instead of a few days, but the rate could be 2% to 4% higher than what a broker would secure. On a $50,000 fit-out, that difference adds thousands over a three-year term.

If speed is the priority and the rate difference is acceptable, dealer finance can work. If the loan amount is significant or the equipment has a long life, comparing options through a broker usually delivers lower repayments and better terms.

Depreciation and Tax Benefits: How the Structure Affects Your Deductions

The depreciation method and asset class determine how much you can claim each year, and the finance structure affects when you can start claiming. Under a chattel mortgage, you own the asset and claim depreciation from day one. Under a lease, you claim the lease repayments as an operating expense instead of claiming depreciation.

For instant asset write-off purposes, eligibility depends on the cost of the asset and the year's threshold, but the key point is that owning the asset through chattel mortgage or hire purchase gives you access to depreciation schedules. Leasing shifts the tax benefit to the repayments themselves, which can suit businesses that prefer consistent annual deductions rather than accelerated write-offs.

A business loan might fund general working capital, but machinery finance is structured to match the asset's life and tax treatment. Talk to your accountant before deciding, because the difference between a lease deduction and a depreciation claim can shift thousands in taxable income depending on your structure.

How Much Deposit Do You Need for Commercial Equipment

Most lenders require a deposit between 10% and 20% of the equipment cost, though some specialised machinery finance products go up to 100% of the purchase price if the equipment holds strong residual value. The deposit size affects the interest rate, loan amount, and approval likelihood.

A transport business buying a truck might put down 20% to secure a lower rate and reduce the loan amount, while a start-up contractor might finance 100% of an excavator if the lender is confident in the equipment's resale value and the business's income projections. The deposit can also include trade-ins, so if you're upgrading existing equipment, the trade value often covers part or all of the deposit requirement.

If you don't have a deposit, expect the lender to look more closely at your trading history, cash flow, and the collateral value of the machinery. Wagga businesses with consistent revenue and good credit history have more options than start-ups or businesses with limited trading history.

What Happens If You Need to Upgrade Before the Term Ends

You can refinance your loan, trade the equipment in and roll the remaining balance into new finance, or pay out the loan early depending on the structure. A balloon payment makes upgrading simpler because the residual acts as the trade-in point, and the balloon amount is typically close to the equipment's market value at that stage.

A builder financing a bobcat over five years with a 25% balloon might decide to upgrade after three years. The equipment is traded in, the sale price covers most of the remaining loan balance, and the shortfall is rolled into the new loan or paid from cashflow. If the equipment holds its value well and the upgrade cycle aligns with the balloon timing, this process is straightforward.

If you upgrade early without a balloon, you'll need to pay out the full loan balance, which might be higher than the equipment's current market value. Structuring the loan with your intended upgrade cycle in mind avoids this mismatch.

Buying machinery shouldn't drain your working capital or leave you stuck with outdated equipment. Whether you're adding a truck, upgrading factory machinery, or fitting out a medical practice, the finance structure should match how long you'll use it and how it fits into your tax planning. Call one of our team or book an appointment at a time that works for you.

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