Before entering into a business loan agreement, a business should consider what the funds are needed for, and whether there may be alternatives. While in many cases, the business loan may well be the best alternative, other alternatives may sometimes make sense. Keep in mind how payments on a business loan will affect your future cash flow and also consider the impact of the interest expense.

If you are considering a business loan to purchase equipment, weigh the advantages of taking the loan against acquiring the equipment through a lease or hire-purchase agreement. The Australian leasing market is very competitive, and the interest rate involved in a lease will often be less than what would be required for an outright financing of the equipment. Also, this decision may go one way or the other, depending on the cost of the equipment involved, and your own tax situation.

A standard operating lease is used when you do not seek to own the equipment at the end of the lease term. Under a hire purchase, also called a finance lease, the lessor sells the lessee the equipment at the end of the lease term for its residual value. Regardless of which type of lease you choose, ownership of the goods still stays with the lessor. The difference is that in a hire purchase, ownership may transfer to the lessee at the end of the term in exchange for additional payment.

One major difference between a standard business loan and a lease, is that if you take out a loan to purchase equipment outright, then you are entitled to take depreciation on the equipment you purchase. In a lease, the lessor takes the depreciation allowance. As such, the individual tax situation of the business that is acquiring the equipment must be considered, to determine whether the depreciation allowance would make a significant difference.

A variation of a hire purchase is a chattel mortgage. With a hire purchase, the lessor buys the equipment and then hires it back to you, but with a chattel mortgage, you buy the goods directly. The tax situation varies between all three options. Lease payments are generally fully deductible, but depreciation may not be claimed. The interest on a hire purchase, but not the whole payment, is deductible, and depreciation can be claimed. There will also be variations in stamp duty payable, depending on the type of lease you choose.