Machinery Finance Calculator

New machinery can transform a business, whether it's a tractor for a farm, an excavator for a groundworks firm or a CNC machine for a workshop. But paying for it outright can tie up cash you need for wages, stock and growth. Machinery finance spreads the cost over the working life of the equipment, so the machine can start paying for itself while you pay for it.

This guide explains how machinery finance works in the UK, how to read a quote, and the VAT and tax points to discuss with your accountant. Use the machinery finance calculator to model monthly payments for your own quote.

The main types of machinery finance

Hire purchase (HP)

Hire purchase is the most common way to finance machinery. You pay a deposit, then fixed monthly payments over a set term, usually two to five years. Once the final payment and any option-to-purchase fee are paid, you own the machine.

Because you're treated as the owner for tax purposes from the start, you can usually claim capital allowances on the full cost straight away, even though you're paying for it over several years.

Finance lease

With a finance lease, the finance company owns the machine and you rent it for most of its useful life. Rentals are usually a business expense, and VAT is charged on each rental rather than upfront. At the end you can typically continue renting for a small amount, or sell the machine on the lender's behalf and keep most of the proceeds.

Operating lease and contract hire

An operating lease covers only part of the machine's life. The lender takes the risk on its future value and you hand it back at the end. It suits equipment you replace regularly, but you'll never own it.

Refinancing

If you already own machinery outright, some lenders will release cash against it. This can help cash flow but adds debt, so it's best used for a clear purpose.

Understanding a machinery finance quote

Quotes can be presented in different ways, so it pays to know what you're looking at.

Flat rate versus APR

Many machinery dealers quote a flat rate. Flat-rate interest is worked out on the full amount borrowed for the whole term, even though you're repaying it every month. That makes a flat rate look much cheaper than an APR.

Take a machine costing £85,000 plus VAT with an £8,500 deposit, leaving £76,500 to finance over 48 months at a 4.9% flat rate:

• Interest = £76,500 × 4.9% × 4 years = £14,994
• Monthly payment = (£76,500 + £14,994) ÷ 48 = about £1,906

That 4.9% flat rate is equivalent to an APR of roughly 9.5%. The machinery finance calculator works out the equivalent APR for any flat-rate quote, so you can compare it fairly against a bank loan or another lender.

Balloon payments

A balloon (or final) payment is a larger lump sum due at the end of the agreement. It lowers the monthly payments, which can help if the machine will earn more later or if you plan to trade it in. The downside is that you pay interest on that amount for the whole term, and you need to have the money, or a plan, when it falls due.

Seasonal and flexible payments

Agricultural lenders often offer payment profiles that match your income, such as larger payments after harvest and smaller ones in leaner months. If your income is seasonal, ask about this. It can make a big difference to cash flow.

VAT on machinery finance

VAT is one of the most important differences between HP and leasing.

• Hire purchase: VAT on the full price is normally due at the start of the agreement, often paid with the deposit. On an £85,000 machine that's £17,000. If you're VAT-registered you can usually reclaim it on your next VAT return, but you need the cash in the meantime. Some lenders offer a short VAT deferral loan to bridge the gap.
• Leasing: VAT is added to each rental, which spreads the cost and avoids a large upfront payment.

Tax relief on financed machinery

Tax treatment depends on your business structure and the agreement, so always confirm with your accountant. In general:

• With hire purchase, you claim capital allowances on the machine and can deduct the interest as a business expense.
• The Annual Investment Allowance lets most businesses deduct the full cost of qualifying plant and machinery, up to £1 million a year, from profits in the year of purchase.
• Companies buying new main-rate plant and machinery can also use full expensing, which has no upper limit.
• With a finance lease, the rentals are generally deductible rather than claiming capital allowances.

Because HP lets you claim allowances on the full cost upfront, it can give a large tax deduction in the first year while you spread the payments over several.

What lenders look for

Lenders will usually review:

• Your trading history, accounts and bank statements
• Your credit record and any existing finance
• The machine itself, including age, make, resale value and whether it's new or used
• How the machine will generate income or savings

Start-ups can get machinery finance, but may need a larger deposit or a personal guarantee.

New or used machinery?

Used machinery is cheaper and has already taken the biggest hit in depreciation. Lenders do finance used equipment, but may limit the term based on the machine's age and require an inspection. New machines come with warranties and often manufacturer-subsidised finance deals, which can be very competitive.

Checklist before you sign

1. Ask for the APR and the total amount payable, not just the monthly cost.
2. Check fees: documentation, arrangement and option-to-purchase fees.
3. Confirm when VAT is due and plan for the cash.
4. Check early settlement terms in case you want to upgrade.
5. Make sure insurance is in place from day one.
6. Talk to your accountant about capital allowances and the best timing.