Finance Terms You Need to Know

Navigating the world of business finance can often feel overwhelming, especially with so many technical terms and jargon to sift through. Whether you’re applying for equipment finance, fleet finance, or even just learning the basics of how business loans work, understanding key financial terms can make all the difference in ensuring you make informed decisions for your business.

In this post, Australian Equipment Finance breaks down the most important finance terms that every business owner needs to know. This guide is designed to help you better understand common phrases used in the finance industry, empowering you to choose the best financing options for your business.

 1. Interest Rate

One of the most commonly searched finance terms is the interest rate. This refers to the percentage of the loan amount that a lender charges the borrower for the use of the money. The interest rate can be fixed (stays the same throughout the loan) or variable (fluctuates based on market conditions).

In Australia, interest rates play a crucial role in determining the overall cost of your business loan or equipment finance agreement. Knowing how interest rates impact your repayments helps you budget effectively and choose the most cost-efficient loan for your business.

 2. Principal

The principal is the original amount of money you borrow in a loan before any interest is added. When you take out a business loan or enter a chattel mortgage, the principal is the amount that needs to be repaid, along with any interest over time.

The size of the principal will determine your monthly repayments, as well as how much interest you’ll pay throughout the life of the loan. If you’re financing equipment, the principal is the total cost of the equipment, excluding any interest or fees.

 3. Chattel Mortgage

A chattel mortgage is a popular form of finance in Australia, particularly for businesses purchasing vehicles or equipment. In a chattel mortgage, the borrower takes ownership of the asset (vehicle, machinery, etc.) while the lender secures the loan with a mortgage over the asset until the loan is repaid.

This type of loan is commonly used in fleet finance and equipment finance, providing a flexible, tax-effective way for businesses to acquire essential assets. With Australian Equipment Finance, we can help you understand the benefits of a chattel mortgage, including potential tax deductions on depreciation and interest.

 4. Balloon Payment

A balloon payment is a large, lump sum payment due at the end of certain types of loans, such as in car finance or equipment leasing agreements. This structure allows borrowers to make smaller, more affordable payments throughout the loan term, with a final balloon payment due at the end.

While balloon payments can help reduce monthly expenses, it’s important to plan ahead for the larger end payment. Australian Equipment Finance can help structure loans that balance low repayments with manageable balloon payments, ensuring you’re financially prepared.

 5. Depreciation

Depreciation refers to the loss of value an asset experiences over time due to wear and tear, age, or obsolescence. In business finance, depreciation can be used as a tax deduction, particularly with equipment finance or vehicle purchases.

Understanding depreciation is crucial when considering asset purchases because it impacts your long-term return on investment. For instance, machinery and vehicles depreciate over time, but their depreciation can be written off as a tax deduction, lowering the overall taxable income of your business.

 6. Lease vs. Hire Purchase

When exploring fleet finance or equipment finance, two common terms you’ll come across are lease and hire purchase. Here’s the difference between the two:

- Lease: In a lease agreement, you don’t own the asset; instead, you pay to use it for a fixed period. This option offers flexibility and often includes the ability to upgrade your equipment or vehicles when the lease ends.

  - Hire Purchase: A hire purchase agreement allows you to eventually own the asset after making fixed payments over time. Once all payments are complete, the asset becomes yours, which is ideal for businesses that want ownership but need to spread the cost.

Both of these financing options are available through Australian Equipment Finance, and each has distinct advantages depending on your business needs.

 7. Loan Term

The loan term refers to the amount of time you have to repay a loan. Loan terms can range from short-term loans (a few months to a couple of years) to long-term loans (several years or more). The length of the loan term will impact your monthly repayments and the total amount of interest you’ll pay over time.

For business finance, equipment finance, and fleet finance, selecting the right loan term is key to balancing monthly cash flow with long-term financial health. Australian Equipment Finance offers tailored loan terms to meet your specific needs, ensuring your repayments remain affordable while supporting business growth.

 8. Secured vs. Unsecured Loans

Secured loans are backed by collateral, which is an asset that the lender can claim if you default on the loan. For example, in a chattel mortgage, the vehicle or equipment you purchase serves as collateral for the loan.

Unsecured loans, on the other hand, do not require collateral but often come with higher interest rates due to the increased risk for the lender. Deciding between secured and unsecured loans depends on your business’s financial situation and the nature of the purchase.

Australian Equipment Finance can help you understand whether a secured or unsecured loan is best suited to your needs, depending on the size of the purchase and your repayment capacity.

 9. Residual Value

Residual value is the estimated value of an asset at the end of its lease or finance term. It’s a key factor in leasing agreements, as it determines how much the asset is worth after you’ve used it for a set period.

For businesses entering into vehicle or equipment leasing agreements, the residual value affects whether you’ll pay more or less if you decide to purchase the asset at the end of the lease. Lower residual values can lead to more affordable purchase options when the lease ends.

 10. Credit Score

Your credit score is a numerical representation of your creditworthiness, based on your credit history. It’s used by lenders to assess the risk of lending to you, and it plays a significant role in determining whether your business can qualify for loans, leases, or finance agreements.

A higher credit score will generally result in better loan terms and lower interest rates, while a lower credit score may make it harder to secure finance or may lead to higher interest rates. Australian Equipment Finance can guide you through the process of applying for finance, regardless of your credit score, and help you find the best solution for your business.

 11. Refinancing

Refinancing is the process of replacing an existing loan with a new one, usually to get better terms, such as a lower interest rate or more favourable repayment schedule. Many businesses opt to refinance their equipment finance or fleet finance agreements to reduce costs or free up cash flow.

At Australian Equipment Finance, we can help you explore refinancing options that might save your business money and make repayments more manageable.

 12. Asset Finance

Asset finance is a type of lending that allows businesses to obtain the equipment or assets they need without having to pay for them upfront. Instead, the lender finances the purchase, and the business repays the loan over time. This method of finance is particularly popular in industries requiring expensive machinery or vehicles, such as manufacturing, construction, or logistics. Australian Equipment Finance offers tailored asset finance solutions to help businesses acquire essential assets while managing cash flow efficiently.

 13. Working Capital

Working capital is the difference between a company's current assets (cash, inventory, receivables) and its current liabilities (short-term debts). It’s an essential measure of a company's financial health and its ability to meet short-term obligations. Maintaining positive working capital is vital for keeping operations running smoothly, especially when expanding or investing in new projects. Many businesses seek working capital loans to improve liquidity.

 14. Amortisation

Amortisation refers to the process of gradually paying off a loan over time through scheduled payments. Each payment covers both the principal and interest, with the goal of fully repaying the loan by the end of its term. Understanding amortisation schedules helps businesses plan their cash flow effectively. Loans with amortisation are common in equipment finance and fleet finance, allowing businesses to spread costs over a long period.

 15. Overdraft Facility

An overdraft facility allows businesses to withdraw more money from their bank account than what is currently available, up to a specified limit. It’s a flexible short-term financing option to cover unexpected expenses or cash flow shortages. While overdrafts are useful, they often come with higher interest rates, so it’s important to use them judiciously.

 16. Fixed vs. Variable Interest Rates

When applying for loans, understanding the difference between fixed and variable interest rates is crucial:

- Fixed Interest Rate: The interest rate stays the same throughout the loan term, providing stability in repayments.

- Variable Interest Rate: The interest rate can fluctuate based on market conditions, potentially lowering or increasing the cost of borrowing.

Choosing between these two options depends on your business’s risk tolerance and market outlook. Australian Equipment Finance can help you choose the best option depending on your business goals.

 17. Invoice Financing

Invoice financing is a form of borrowing where businesses use their outstanding invoices as collateral to secure immediate cash flow. It’s particularly useful for businesses that have long payment cycles but need working capital in the short term. Australian Equipment Finance offers invoice financing solutions to help businesses maintain liquidity while waiting for payments from clients.

 18. Loan-to-Value Ratio (LVR)

The loan-to-value ratio (LVR) is the ratio of a loan amount to the value of the asset being financed. For example, if you are financing a vehicle worth $100,000 with an $80,000 loan, your LVR is 80%. Lenders use LVR to assess risk: a lower LVR means less risk for the lender and may result in better loan terms. Understanding LVR is important in equipment finance and fleet finance when securing the best possible loan conditions.

 19. Trade Finance

Trade finance involves financing international trade transactions, such as the purchase of goods and services from overseas suppliers. It’s a critical tool for businesses that operate in import/export industries, helping them manage cash flow and reduce payment risk. Trade finance may include products such as letters of credit, guarantees, and export financing to facilitate cross-border transactions.

 20. Equipment Lease

An equipment lease is a type of financing where a business rents equipment from a lender for a specified period, with the option to either return the equipment or purchase it at the end of the lease term. This type of finance is ideal for businesses that require updated or rapidly changing equipment, as it avoids the large upfront costs associated with purchasing outright. At Australian Equipment Finance, we offer flexible equipment leasing options that allow businesses to upgrade machinery or vehicles without the capital outlay.

Understanding these 20 essential finance terms can help you better navigate the world of business loans, fleet finance, and equipment finance in Australia. Whether you’re looking to expand your business, acquire new assets, or simply improve cash flow, having a solid grasp of financial terminology ensures you’re well-equipped to make the right decisions.

At Australian Equipment Finance, we are dedicated to providing the tools and knowledge necessary for Australian businesses to thrive. Our experts are here to guide you through each financing product, helping you unlock new opportunities for growth.