Equipment Finance

A balloon on a chattel mortgage, or a residual on a lease, is an amount deferred to the end of the term. It lowers the monthly repayment and it does not lower the debt.

• At the end of the term the balloon has to be paid, refinanced, or covered by selling the asset.
• Interest accrues on the deferred amount for the whole term, so a balloon raises the total cost of the finance.
• The risk is negative equity. If the asset is worth less at term end than the balloon owing, selling it will not clear the debt.
• Assets that hold value, such as good-condition earthmoving plant and prime movers, carry a balloon more comfortably than assets that depreciate hard.
• Residual amounts on leases are subject to guidelines that vary by asset type and term. Your financier will tell you the permitted range for your asset.

Used well, a balloon matches the repayment to the earnings the asset produces. Used to make an unaffordable machine look affordable, it postpones a problem and adds interest to it.

Balloon

An amount deferred to the end of a chattel mortgage term. It lowers the monthly repayment and it does not lower the debt.

Residual

The lease equivalent of a balloon — the amount payable at the end of the term, within the guidelines that apply to that asset type and term.

Negative equity

Where the asset is worth less than the amount still owing on it. Selling will not clear the debt, and the shortfall has to come from somewhere.

Useful life

How long the asset will realistically keep earning. The term belongs inside it, whatever a repayment sheet says is possible.

Equipment finance is often faster and easier than a general business loan, because the asset is the security and the lender knows what it is worth.

• Asset age and type matter. Lenders classify assets as primary, secondary and tertiary, and pricing follows that classification. Yellow goods and trucks are treated more favourably than fit-out or point-of-sale equipment.
• On a private sale the lender will search the PPSR to confirm the seller can actually pass clear title. Buying a machine with finance still registered against it is a real risk and this search is what prevents it.
• Property ownership by the directors, even without taking a mortgage, improves the terms available with many asset financiers.
• The term should sit inside the useful life of the asset. A five-year term on a machine with three good years left is a problem waiting to happen.

A sale and leaseback, or an equity release against unencumbered plant, converts an asset sitting in the yard into working capital. For asset-heavy businesses this is often the cheapest cash available that does not involve the family home.

1. 01

   List what you own outright

   Plant, trucks, trailers, machinery. Include serial numbers, hours or kilometres, age and condition. Anything still under finance is excluded until it is paid out.

2. 02

   Establish realistic value

   Financiers work from trade or forced-sale values rather than replacement cost. A recent valuation or comparable sales evidence helps.

3. 03

   Check the PPSR

   Old registrations that were never discharged will stop a settlement. Better to find them now than on the day funds are due.

4. 04

   Decide how much to release

   Releasing equity re-encumbers an asset you had free and clear. It is worth doing for a defined purpose with a return, and less worth doing to cover a recurring shortfall that has not been diagnosed.

5. 05

   Structure the term against remaining life

   Do not refinance a ten-year-old machine over five years. If it stops earning before the term ends, the repayment continues without it.

We do not publish rates, because asset finance pricing moves with the asset class, the term, the age of the goods and the strength of the applicant. What you can do is make sure two quotes are actually comparable.

1. 01Ask for the total amount payable over the term, including the balloon, every fee and any brokerage.
2. 02Confirm whether the quoted repayment includes GST and whether it includes any insurance premium being financed.
3. 03Ask what the early payout figure looks like at year two. Some asset finance contracts are structured so early termination saves less than you would expect.
4. 04Check whether the establishment fee is financed into the contract or payable up front.
5. 05Confirm who registers and who discharges the PPSR interest at the end, and that the discharge actually happens.
6. 06Ask what happens if the asset is written off. The insurance proceeds may not equal the payout figure, and gap cover is a separate decision.

The repayment calculator on this page is indicative only. It is not an offer of credit, not a quote and not a guarantee of approval, and it will not account for a balloon unless you model it separately.