Top tips to finance equipment for your business

Choosing between secured and unsecured equipment finance

A secured business loan uses the equipment itself as collateral, which typically gives you access to a lower interest rate and higher loan amount. An unsecured business loan doesn't require collateral but usually comes with a higher rate and stricter eligibility criteria.

Consider a manufacturing business in Dandenong that needs a $60,000 laser cutting machine. Using the equipment as security could bring the interest rate down by 2 to 3 percentage points compared to an unsecured option. The lender registers a charge against the machine, which means you can't sell it without settling the loan first. If the equipment holds strong resale value and you're confident in the purchase, securing the loan against it usually makes sense. If you're buying specialised equipment with limited resale appeal or you want to keep your options open, an unsecured structure might be worth the extra cost.

The equipment you're purchasing doesn't always qualify as security. Software, fit-outs, and highly specialised machinery can be difficult to value or resell, which means lenders may not accept them as collateral even if you're willing to offer them. In those cases, you'll either need to provide alternative security like commercial or residential property, or proceed with unsecured business finance.

Fixed or variable rates for equipment loans

Fixed interest rates lock in your repayment amount for a set period, which makes budgeting predictable. Variable interest rates move with the market, which can work in your favour if rates fall but increases your repayments if they rise.

Most lenders offer terms between one and seven years for equipment finance. If you're buying equipment with a clear lifespan, matching the loan term to that lifespan keeps you from paying off a loan on equipment that's already been replaced. A cafe in Fitzroy purchasing a $40,000 coffee roaster with an expected working life of five years would align a five-year loan term with the equipment's usefulness. Fixing the rate for that full term removes the risk of repayment increases halfway through, but it also means you'll pay a break cost if you want to refinance or sell the equipment early.

Variable rates give you flexibility. Most variable equipment loans include redraw or the option to make extra repayments without penalty, which helps if your cash flow improves and you want to reduce the balance ahead of schedule. You'll also avoid break costs if you decide to upgrade or sell the equipment before the loan term ends.

Loan structures that match how you use the equipment

A business term loan gives you the full loan amount upfront, which suits a single purchase with a known price. If you're buying equipment in stages or you're not sure of the final amount yet, a progressive drawdown lets you take the funds as you need them and only pay interest on what you've drawn.

Progressive drawdown works well when you're purchasing multiple pieces of equipment over several months or when the supplier requires staged payments. A construction company in Geelong ordering three excavators with staggered delivery dates could draw down funds as each machine arrives rather than taking the full amount on day one and paying interest on money sitting in the bank account. The lender sets an availability period, usually three to six months, during which you can request drawdowns. Once that period ends, the loan converts to a standard term loan with regular repayments.

A revolving line of credit operates more like a business overdraft. You're approved for a limit, you draw what you need, repay it, and draw again as required. This structure suits businesses that regularly purchase smaller equipment items or need ongoing access to funds for working capital alongside equipment costs. The interest rate on a line of credit is typically higher than a term loan because of the added flexibility, and lenders usually review the facility annually.

How lenders assess equipment finance applications

Lenders look at your cash flow, business financial statements, and debt service coverage ratio to decide whether you can manage the repayments. The debt service coverage ratio measures how much operating income you have available to cover all your loan repayments, including the new equipment loan.

A ratio below 1.2 will make most lenders hesitant. A transport business in Mornington Peninsula applying for a $90,000 truck loan with annual operating income of $200,000 and existing loan repayments of $80,000 per year would need the new loan repayments to stay under $47,000 annually to maintain a ratio of 1.2. If the equipment purchase pushes the ratio too low, the lender may reduce the loan amount, ask for additional security, or decline the application.

Your business credit score also influences the decision. Late payments, defaults, or court judgments reduce your score and limit your options. Some lenders specialise in applications with credit issues, but the trade-off is a higher interest rate and a shorter loan term. If your credit file has minor issues but your cash flow is solid, providing a detailed cashflow forecast and business plan can shift the lender's focus toward your current financial position rather than past mistakes.

Structuring repayments around your revenue cycle

Most equipment loans use monthly repayments, but some lenders offer flexible repayment options that align with seasonal or irregular income. If your revenue is concentrated in certain months, quarterly or seasonal repayments reduce pressure during slower periods.

A tourism operator in the Yarra Valley purchasing a $50,000 passenger vehicle might arrange higher repayments during summer and lower repayments during winter when visitor numbers drop. This structure requires a conversation with the lender upfront because it's not a standard option, and not all lenders offer it. You'll usually need to demonstrate a clear revenue pattern over at least two years and show that your cash flow can meet the higher repayments when they're due.

Interest-only periods are another option, though less common for equipment finance than for commercial loans. An interest-only period delays principal repayments for six to twelve months, which can help if you're buying equipment that won't generate revenue immediately. Once the interest-only period ends, repayments increase because you're paying both principal and interest over a shorter remaining term.

Comparing equipment finance to other funding options

Equipment finance is a form of commercial lending designed specifically for purchasing assets. If you need funds for equipment and other purposes like stock, wages, or covering unexpected expenses, a broader business loan might make more sense. Splitting your borrowing across multiple loans adds complexity, and consolidating everything into one facility can reduce your admin and sometimes lower your overall interest cost.

If you already have a relationship with a lender and available equity in a commercial or residential property, refinancing to release funds for the equipment purchase might deliver a lower rate than a standalone equipment loan. The downside is that you're securing the equipment against property that wasn't previously tied to business debt, which increases your risk if the business runs into trouble.

Invoice financing and a business line of credit are alternatives if your main concern is preserving working capital rather than funding the equipment itself. Invoice financing advances you cash against unpaid invoices, which provides immediate funds without adding a fixed loan repayment. A line of credit gives you access to funds when you need them, which works well if you're managing cash flow alongside equipment purchases. Neither option is a direct replacement for equipment finance, but they're worth considering if your funding need extends beyond the equipment itself.

Frequently Asked Questions