What Is Asset Finance?
Asset finance is a category of lending that allows businesses and individuals to acquire equipment, vehicles, machinery, and other physical assets without paying the full purchase price upfront. Instead, you spread the cost over a set period (typically 1 to 7 years) through regular repayments, while using the asset from day one.
In Australia, asset finance is one of the most common forms of business lending. It preserves your working capital for day to day operations while allowing you to invest in the equipment you need to grow your business. It also provides predictable cash flow, with fixed repayments that make budgeting straightforward.
The Australian asset finance market is served by banks, specialist finance companies, manufacturer finance arms (like Toyota Financial Services or CAT Financial), and non bank lenders. Each offers different products, rates, and approval criteria, which is why comparing options across the market is essential.
What You Can Finance
Asset finance covers a broad range of business assets, including:
- Motor vehicles: cars, utes, vans, trucks, and light commercial vehicles
- Heavy vehicles and transport: prime movers, trailers, buses, refrigerated trucks
- Construction and earthmoving: excavators, loaders, cranes, concrete pumps
- Manufacturing: CNC machines, lathes, presses, production line equipment
- Medical and dental: chairs, imaging equipment, sterilisation units, practice fit outs
- Technology: servers, networking equipment, point of sale systems, specialised software licences
- Agricultural: tractors, headers, irrigation systems, livestock handling equipment
- Hospitality: commercial kitchens, cold rooms, coffee machines, fit outs
- Office: furniture, fit outs, telecommunications systems
Types of Asset Finance in Australia
There are several distinct types of asset finance, each with different ownership structures, tax treatments, and end of term options. The right choice depends on your business structure, tax position, and what you want to happen with the asset at the end of the term.
Chattel Mortgage
A chattel mortgage is the most common form of asset finance for GST registered businesses in Australia. With a chattel mortgage, you purchase the asset and the lender takes a mortgage (charge) over it as security for the loan. You own the asset from day one.
How It Works
The lender provides funds to purchase the asset. You make regular repayments (usually monthly) over the agreed term (typically 2 to 5 years). You can set a balloon payment (a lump sum due at the end) to reduce your monthly repayments. The lender removes their charge once the loan is fully repaid.
Tax Benefits
Because you own the asset, you can claim depreciation and the interest component of repayments as tax deductions. If you are registered for GST, you can claim the full GST on the purchase price in your next BAS, regardless of the finance term. This provides a significant cash flow benefit in the first quarter after purchase.
Best For
GST registered businesses that want ownership of the asset, the ability to claim GST upfront, and the flexibility of a balloon payment to manage cash flow.
Finance Lease
A finance lease (sometimes called a capital lease) is an arrangement where the finance company purchases the asset and leases it to you for a fixed term. You have use of the asset for the full term, but the finance company retains legal ownership.
How It Works
You select the asset and the finance company purchases it on your behalf. You pay fixed monthly lease rentals for the agreed term. At the end of the lease, you typically have three options: pay the residual value to purchase the asset outright, re finance the residual and continue leasing, or return the asset to the lessor.
Tax Benefits
Lease rentals are generally tax deductible as a business expense, but the treatment varies depending on whether the lease is classified as a finance lease or an operating lease for tax purposes. You cannot claim depreciation because you do not own the asset. GST is charged on each lease payment rather than being claimable upfront.
Best For
Businesses that prefer to upgrade equipment regularly at the end of each lease term, or businesses that do not want the residual ownership risk of the asset depreciating below the balloon value.
Operating Lease
An operating lease is a true rental arrangement. You pay to use the asset for a period that is typically shorter than the asset useful life, and you return it at the end. The lessor retains ownership and bears the residual value risk.
How It Works
The finance company purchases the asset and leases it to you for a fixed period. Monthly payments are typically lower than a finance lease because you are not paying for the full value of the asset, only the depreciation during your use period. At the end, you return the asset (subject to fair wear and tear conditions).
Tax Benefits
The full lease payment is typically tax deductible as a business operating expense. The asset does not appear on your balance sheet (which can be advantageous for businesses managing their debt to equity ratios).
Best For
Businesses that need equipment for a defined period and want to return it at the end (for example, technology that becomes obsolete, or project specific machinery). Also suits businesses that want to keep assets off the balance sheet.
Hire Purchase
A hire purchase agreement is similar to a chattel mortgage in that you end up owning the asset, but during the hire period, the finance company retains legal ownership. Ownership transfers to you when the final payment is made.
How It Works
You hire the asset from the finance company and make regular payments over the agreed term. You have full use of the asset during the hire period. When all payments (including any final residual) are made, ownership transfers to you automatically.
Tax Benefits
You can claim depreciation on the asset and the interest component of repayments as tax deductions. However, unlike a chattel mortgage, you cannot claim the full GST upfront because you do not technically own the asset during the hire period. GST is charged on each payment.
Best For
Businesses that are not registered for GST (sole traders under the GST threshold), or businesses that prefer a simple structure with automatic ownership at the end of the term.
Car Loans for Business and Personal Use
If you are purchasing a vehicle primarily for personal use (or you are not registered for GST), a standard car loan or consumer asset finance product may be more appropriate than a chattel mortgage or lease.
Car loans for personal use work like a standard secured loan. You own the vehicle from day one, you make monthly repayments over 1 to 7 years, and you can set a balloon payment to reduce monthly costs. Interest rates for car loans are typically higher than home loan rates but lower than unsecured personal loans because the vehicle serves as security.
For business car purchases where the vehicle is used partly for personal use (a common scenario for sole traders and small business owners), the tax treatment depends on the percentage of business use. You can claim the business use percentage of interest, depreciation, and running costs. Your accountant can advise on the most appropriate method (logbook or cents per kilometre) for your circumstances.
For vehicles used more than 50% for business purposes, a chattel mortgage is almost always the most tax effective structure for GST registered businesses because of the upfront GST credit and the ability to claim depreciation. For vehicles used primarily for personal purposes, a standard car loan with the most competitive interest rate is the simpler and often cheaper option.
Tax Considerations for Asset Finance
The tax treatment of asset finance is one of the most important factors in choosing the right structure. Here is a summary of the key differences.
Instant Asset Write Off
The Australian Government instant asset write off scheme allows eligible businesses to immediately deduct the full cost of eligible assets in the year of purchase, rather than depreciating them over their useful life. The threshold and eligibility criteria have changed frequently, so check the current rules on the ATO website or with your accountant before making purchasing decisions based on this incentive.
When using asset finance with the instant asset write off, the full purchase price of the asset can be written off in the year of purchase (subject to the threshold), even though you are paying it off over several years. This can create a significant tax benefit in the year of acquisition.
GST Treatment by Finance Type
Chattel mortgage: Full GST on the purchase price claimed in the next BAS after acquisition.
Finance lease: GST is charged on each monthly lease payment and claimed progressively.
Operating lease: GST is charged on each monthly lease payment and claimed progressively.
Hire purchase: GST is charged on each payment and claimed progressively.
Depreciation
You can only claim depreciation on assets you own. This means chattel mortgages and hire purchase agreements allow depreciation claims, while leases do not (because the lessor, not you, owns the asset). However, with leases, the lease payments themselves are deductible, which often achieves a similar net outcome.
Tax rules for asset finance are complex and change regularly. The summary above is a general guide only. Always consult your accountant before choosing an asset finance structure based on tax benefits, as your individual circumstances (business structure, turnover, other deductions) significantly affect the outcome.
Balloon Payments and Residual Values Explained
A balloon payment (used with chattel mortgages and car loans) or residual value (used with leases) is a lump sum that is deferred to the end of the finance term. Instead of spreading the entire cost evenly over the term, you pay a smaller amount each month and a larger amount at the end.
Why Use a Balloon or Residual?
The primary reason is cash flow. A $60,000 vehicle financed over 5 years with no balloon might cost approximately $1,200 per month. The same vehicle with a 30% balloon ($18,000 due at the end) might cost approximately $900 per month. The lower monthly payments free up cash for other business purposes.
What Happens at the End?
When the balloon payment or residual falls due, you have several options:
- Pay it out. Use available cash to pay the lump sum and own the asset outright (chattel mortgage or hire purchase) or purchase the asset from the lessor (lease).
- Refinance it. Take out a new finance arrangement to pay the balloon or residual, spreading it over an additional period.
- Trade in. Sell or trade the asset. If it is worth more than the balloon or residual, you pocket the difference. If it is worth less, you need to cover the shortfall.
- Return the asset. For leases only, you can return the asset to the lessor (subject to fair wear and tear conditions).
Setting a high balloon or residual reduces your monthly repayments but increases the total interest you pay over the life of the finance (because you are carrying a higher balance for longer). It also creates a risk at the end of the term: if the asset has depreciated below the balloon or residual amount, you will owe more than the asset is worth. Be realistic about the asset future value when setting the balloon.
How to Choose the Right Asset Finance Structure
The best structure depends on your business type, GST registration, and what you want to happen with the asset at the end of the term. Here is a simple decision framework:
- Are you GST registered? If yes, a chattel mortgage is typically the most tax efficient option because of the upfront GST credit. If no, hire purchase or a standard loan may be more appropriate.
- Do you want to own the asset at the end? If yes, choose a chattel mortgage, hire purchase, or loan. If no (or if you want flexibility to return or upgrade), choose a lease.
- Do you want the asset on or off your balance sheet? If off balance sheet, an operating lease keeps the asset off your books. All other structures will show the asset and corresponding liability on your balance sheet.
- How long will you use the asset? If you plan to keep it for its full useful life, ownership structures (chattel mortgage, hire purchase) make more sense. If you plan to replace it after a few years, a lease with an upgrade path may be more cost effective.
- What is your cash flow priority? If minimising monthly payments matters most, set a higher balloon or residual. If minimising total cost matters most, choose the shortest term with no balloon that your cash flow can support.
Getting Approved for Asset Finance
Asset finance approvals are generally faster and simpler than property finance because the asset itself serves as security and the loan amounts are typically smaller.
For Established Businesses (2+ Years Trading)
Many lenders offer streamlined approval processes for established businesses with good credit. For assets under $150,000 to $250,000 (depending on the lender), you may only need to provide: an application form, details of the asset being financed, your ABN and GST registration, and a credit check authorisation. No financial statements or tax returns required. Approvals can be as fast as same day.
For New Businesses (Under 2 Years Trading)
Newer businesses face more scrutiny. Expect to provide: personal and business tax returns (if available), bank statements showing business income, evidence of industry experience, and potentially a larger deposit (10% to 20%). Some lenders will not finance new businesses at all, while others specialise in this segment.
For Individuals
If you are financing a vehicle or asset for personal use, approval is based on your personal income, credit history, and existing debts. You will typically need payslips or tax returns showing stable income, a good credit score, and details of your current financial commitments.
Compare Asset Finance Options From Multiple Lenders
Whether you need a work vehicle, equipment, or machinery, Lendera can compare options across banks, specialist financiers, and manufacturer finance arms. Fast approvals, competitive rates.
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