Most equipment finance mistakes are not about choosing the wrong product. They are about assumptions that seemed reasonable at the time and turned out to be wrong. This article covers the most common ones, the myths that lead people there, and a plain-language guide to novated leases for both employees and business owners.
Mistakes and Myths: The Ones That Cost the Most
The rate matters but it is not the only number that matters. Establishment fees, monthly account-keeping fees, early repayment conditions, and the balloon payment at the end all affect what you actually pay over the life of the loan. Two facilities with the same interest rate can have meaningfully different total costs once all fees are included.
What to do instead: Ask for the total cost of the facility in dollars across the full term. Then compare that number, not just the rate.
This feels logical. More applications mean more options. But every formal application creates an enquiry on your credit file. Multiple enquiries in a short period signal to lenders that you are struggling to get approved, which can push you into a worse rate tier or result in declines from lenders who would otherwise have said yes.
What to do instead: Work with a broker who can assess your profile against the market and direct your application to the right lender once, protecting your credit file in the process.
A balloon payment reduces your monthly repayments during the loan term by deferring a portion of the principal to the end. It does not reduce the total amount you owe. When the loan ends, you either pay the balloon in full, refinance it, or sell the asset to cover it. If the asset has depreciated more than expected, the balloon may be higher than the equipment is worth.
What to do instead: Understand what the balloon payment is in dollar terms and have a clear plan for how it will be met before you sign. Ask your accountant and your broker to look at this together.
Paying cash for equipment avoids the interest cost but it ties up capital that could be working elsewhere in the business. For many businesses, the cost of not having that cash available, the contracts not taken, the staff not hired, the opportunities missed, is higher than the interest they would have paid on a well-structured facility.
What to do instead: Finance the equipment and keep the cash in operations. The interest on a properly structured equipment facility is generally tax-deductible. Your accountant can confirm how this applies to your situation.
A strong credit score helps and opens more lender options. But equipment finance is available to businesses with imperfect credit histories, newer ABNs, and less-than-ideal financial profiles, depending on the asset type, the loan amount, and the lender. The lender pool narrows as the credit profile weakens, but it does not disappear entirely.
What to do instead: Get a clear picture of where your credit profile sits before you apply. A broker can identify which lenders are appropriate for your specific situation rather than leaving you to find out by trial and error.
The structure of your equipment finance, whether it is a chattel mortgage, a finance lease, or a rental arrangement, affects how it is treated for tax and accounting purposes. Claiming depreciation, GST on the purchase, and the interest deduction all depend on the structure chosen. Getting this wrong costs money that does not need to be lost.
What to do instead: Brief your accountant before you sign anything. Your broker and your accountant should agree on the right structure for your specific tax position before the facility is settled.
Novated Leases: A Plain-Language Explanation
A novated lease is a way for an employee to finance a car through their employer using pre-tax salary. It is one of the more useful and most misunderstood products in personal finance. Here is how it actually works.
A three-way agreement between you, your employer, and a finance company. Your employer agrees to make the lease payments on your behalf out of your pre-tax salary. Because the payments come out before tax is calculated, you are effectively using money that would otherwise have gone to the ATO to pay for your car.
Any employee whose employer is willing to participate. The employer does not need to be a large company. Many small and medium businesses offer novated leases as a staff benefit. If you are a business owner who pays yourself a salary through your company, you may also be eligible, though the rules are more complex. This is worth discussing with your accountant.
The lease payments on the vehicle, and typically the running costs too, including fuel, registration, insurance, and servicing. These are bundled into a single regular payment from your pre-tax salary. The technical term for this structure is a fully maintained novated lease.
The novation agreement transfers with you if your new employer agrees to take it on. If they do not, the lease typically reverts to you personally. You continue making payments directly to the finance company, but without the pre-tax benefit. This is one of the practical risks of a novated lease that people do not always think through before they sign.
Electric vehicles have become significantly more attractive under a novated lease since the Australian government introduced an exemption from fringe benefits tax for eligible zero and low-emission vehicles. This has made the cost advantage of a novated lease for an electric vehicle considerably larger than for a petrol car. The rules around this are specific and subject to change. Your accountant and your broker should both be involved before you proceed.
Pros and cons for employees
For business owners considering a novated lease for themselves
If you own the business and pay yourself a salary, a novated lease is technically available to you. The business acts as the employer, you act as the employee, and the lease is structured accordingly.
In practice, there are important considerations. The ATO scrutinises arrangements where the employer and employee are effectively the same person. The fringe benefits tax treatment of the vehicle will depend on how much it is used for business versus personal purposes. The rules are not simple and the consequences of getting them wrong are real.
A novated lease for a business owner is not a decision to make based on a blog article, including this one. The tax treatment depends on your business structure, your salary arrangement, how the vehicle is used, and current ATO guidance. Talk to your accountant first. If a novated lease is the right structure, a broker can then help you find the most appropriate facility. If it is not, there are other ways to finance a vehicle through a business that may serve you better.
The Finance Structures That Most Businesses Do Not Know Exist
Beyond the standard chattel mortgage and finance lease, there are a few structures that many business owners have never heard of but that solve specific problems well.
Sale and leaseback
You already own the equipment. You sell it to a finance company and immediately lease it back from them. This releases the capital tied up in the asset into your working capital, while you retain full use of the equipment. It is useful for businesses that have purchased equipment outright and later realise they need that cash back in operations.
Not all assets qualify. The lender will assess the current market value of the equipment and lend against that. The older or more specialist the asset, the less capital can typically be released. Your accountant should review the tax treatment before you proceed.
Balloon refinance
When a loan with a balloon payment reaches the end of its term, you have three options: pay the balloon, sell the asset, or refinance it. Balloon refinance extends the life of the facility so you are not forced to come up with a large lump sum at the end of the original term. It is particularly useful for trucks and earthmoving equipment where the asset still has useful life remaining but the original loan has matured.
Mid-term refinance
If your financial position has improved since you took out your original equipment finance, you may be able to refinance mid-term to access a better rate. This is not always straightforward because early repayment conditions vary by lender, but it is worth reviewing your existing facilities periodically to see whether the market has moved in your favour.
Most businesses review their equipment finance only when they need something new. The ones that manage it well review their existing facilities annually, the same way you would review any recurring cost. A broker can do this assessment with you and tell you whether there is anything worth acting on.
Bringing the Three Parts Together
Across this series we have covered the three asset tiers and why they matter, how pricing is built and what you can do to improve it, and the mistakes and structures most people encounter only after they have already made a decision they cannot easily undo.
The thread through all three parts is the same. Equipment finance rewards preparation. Knowing where your asset sits, what your credit profile looks like, whether property backing is available, and which lender is appropriate for your specific situation before you apply puts you in a fundamentally different position to one where you discover all of this during the application process.
A specialist broker is not just someone who fills out forms. They are the person who maps the full picture before anything is submitted, protects your credit file, and gives you the honest assessment of what is available and what is not. That conversation costs nothing and consistently produces better outcomes than going it alone.
Frequently Asked Questions
With a chattel mortgage, you own the asset from day one and the lender holds it as security. With a finance lease, the lender owns the asset and you pay to use it. At the end of the lease term you typically have an option to purchase the asset for a residual amount. The right choice depends on your cash flow, your tax position, and whether you want to own the asset outright at the end of the term. Your accountant can advise on which structure suits your specific situation.
Yes, in many cases. Refinancing mid-term may allow you to access a better rate if your financial position has improved or if market conditions have changed. At the end of a term, refinancing a balloon payment is a common way to avoid a large lump sum. Not all lenders allow early repayment without a fee, so check the terms of your existing facility before you proceed. A broker can assess whether refinancing makes financial sense for your specific situation.
The fringe benefits tax exemption introduced for eligible zero and low-emission vehicles has made novated leases considerably more attractive for electric vehicles than for petrol cars. For many employees, the tax saving is significant. Whether it is right for you depends on your salary, your tax rate, the cost of the vehicle, and how it will be used. Your accountant should model the actual numbers for your situation before you commit.
A residual or balloon is the lump sum due at the end of the loan term. It is set at the start of the loan and represents the portion of the asset’s value that has not been repaid through the regular payments. If you cannot pay it in cash at the end of the term, you have two main options: refinance it into a new facility, or sell the asset and use the proceeds to cover it. If the asset is worth less than the balloon at the end of the term, you may need to make up the difference from other funds.
Sale and leaseback suits businesses that own equipment outright and need to release cash into their operations without giving up the use of the asset. It is worth considering if you have significant capital tied up in equipment and your working capital is under pressure. The amount you can release depends on the current market value of the asset. Your accountant should review the tax treatment and your broker can identify which lenders are active in this space for your asset type.
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