A business equipment loan lets you buy machinery, vehicles or tools now and pay for them over time from the income they help create.
For South Morang business owners, the main decision is how to structure the loan so the repayments suit your cash flow. The structure matters as much as the interest rate. It covers whether the loan is secured, whether the rate is fixed or variable, and how long you repay it.
What Are Your Options for Purchasing Business Equipment?
The two main ways to fund equipment are a dedicated equipment loan and a general business term loan. A dedicated loan is built around the asset you are buying, while a general term loan can be used for equipment and other costs.
Our equipment finance and asset finance services cover the first type. These loans usually run over a set term, and the lender often takes security over the item being purchased. A general business loan suits owners who need to fund equipment alongside other costs, such as fit-out or stock.
A business line of credit or overdraft can also cover smaller purchases. The trade-off is that these facilities are designed for short-term working capital. Using them for long-life equipment can leave you carrying a balance with no fixed end date.
Secured vs Unsecured Business Loan for Equipment
A secured business loan is backed by an asset, usually the equipment itself, while an unsecured business loan relies on your business and financial position alone. The right choice depends on the amount you need and how much security you can offer.
When the equipment is the collateral, lenders can often offer a larger loan amount and may price the loan lower than an unsecured option. The trade-off is that the lender can repossess the asset if repayments are missed. Unsecured business finance avoids tying up an asset. It often comes with a higher interest rate, a lower limit or a shorter term, depending on the lender.
Secured finance is often used for large items such as a truck or commercial oven, but remember the lender can repossess the asset if repayments are missed. For smaller tools or technology, unsecured finance may be enough.
Equipment Loan Repayments: A $60,000 Worked Example
An illustrative $60,000 equipment loan at 6.75% p.a. over five years would have monthly repayments of about $1,181 on a principal and interest basis. This rate is for illustration only. Your actual rate will depend on your lender, your business profile and the security offered.
Consider a South Morang landscaping business owner who wants to buy a $60,000 excavator to stop hiring one for each job. The owner arranges a secured loan with the machine as collateral. The repayment of about $1,181 a month is compared against the hire fees the business currently pays and the extra jobs it could take on with its own machine.
The owner should compare their own monthly hire spend with the repayment. If hire costs are higher than the repayment, the loan could cost less per month, but the owner must still allow for maintenance, insurance, fees and the risk that work slows down. If the owner takes a fixed rate, the repayment is fixed for the fixed period, which gives a predictable monthly cost. With a variable rate the repayment could change. Check the numbers for your own purchase with a calculator, and ask your accountant how the purchase will be treated for tax.
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Fixed or Variable Interest Rate on an Equipment Loan
A fixed interest rate keeps your repayments the same for the fixed period, while a variable interest rate can rise or fall over the life of the loan. Fixed rates suit owners who need certainty, and variable rates suit owners who want flexibility.
With a fixed rate, you know the repayment in advance, which helps with a cash flow forecast. The trade-off is that exiting or changing the loan early may trigger break costs, depending on the lender. Variable loans may allow extra repayments or an early payout with fewer restrictions, but your repayments can increase if rates rise. Always ask what is available before you commit.
How Lenders Assess an Equipment Loan Application
Lenders look at whether your business can comfortably afford the repayments, how long it has traded and how you have managed credit in the past. The asset you are buying also matters, because it often forms the security.
Most lenders will want to see recent business financial statements and a clear picture of your income. A newer business may need to show a business plan or a cashflow forecast to explain how the equipment will lift revenue. Your business credit score and your personal credit history can both influence the outcome. Some lenders also look at the debt service coverage ratio, which compares your income with your total loan repayments.
If you also own your home or other property, your wider borrowing position can affect what a lender will approve. Our borrowing capacity page explains how lenders view your overall commitments. Our loans for business owners page covers the finance options we offer to owners across a range of industries.
A broker can compare options from the lenders on their panel and help present your application. That matters when lenders weigh up the same business in different ways. Our South Morang mortgage broker page has more on how we work with local clients.
Frequently Asked Questions
What is the difference between a secured and unsecured business loan for equipment?
A secured loan is backed by an asset, usually the equipment being purchased. An unsecured loan relies on your business finances alone, and it often has a higher rate or a lower limit, depending on the lender.
How much would a $60,000 equipment loan cost each month?
At an illustrative rate of 6.75% p.a. over five years on a principal and interest basis, repayments would be about $1,181 a month. Your actual rate will depend on your lender and business profile.
Should I choose a fixed or variable rate for equipment finance?
A fixed rate gives repayment certainty but may involve break costs if you exit early. A variable rate offers more flexibility but your repayments can rise if rates increase.
What do lenders look at when approving equipment finance?
Lenders assess your ability to afford the repayments, your trading history and your credit record. The equipment itself often forms the security.
