Picking the right financing for your business’s vehicles or equipment can really make a difference in cash flow and tax planning. Commercial hire purchase vs chattel mortgage each brings unique perks that can shape how you manage assets and handle finances, so knowing the ins and outs is key to making the best call.
With a commercial hire purchase, you pay in instalments to use the asset, owning it once you’ve finished the term. With a chattel mortgage, you own the asset right away, using it as security for the loan.
Wondering which one’s the best fit? Keep reading to learn more!
Commercial Hire Purchase Vs Chattel Mortgage – An Overview
When you’re choosing between a commercial hire purchase and a chattel mortgage, it’s all about how each one affects your asset ownership and finances. A commercial hire purchase lets you pay over time, giving you ownership down the track while keeping cash flow steady. A chattel mortgage, on the other hand, gives you full ownership from the start—great if you want to use the asset as collateral or take advantage of tax deductions straight away. Both options suit different financial strategies, so the right choice really depends on your goals and needs.
Make the Right Choice with Co-Pilot Finance & Insurance In Australia
Choosing between a commercial hire purchase and a chattel mortgage can feel tricky, but it’s a decision that affects your business’s financial future. At Co-Pilot Finance & Insurance, we’re here to make it easy and tailored to you. With our experience helping Aussie businesses, we’ll help you weigh the pros and cons of each option, making sure it fits with your cash flow, taxes and long-term goals.
Let us make financing simple and help your business thrive with the best option. Contact Us today for personalised advice!
What is a Commercial Hire Purchase?
A commercial hire purchase (CHP) is a finance deal where businesses can hire a vehicle or equipment for a fixed term. The lender buys the asset on your behalf, and you pay it off over time. Once you’ve made the final payment, the asset becomes yours.
How Does it Work?
In a CHP agreement, the financier buys the asset your business needs and hires it out to you over a set period. You make regular payments covering the asset’s cost plus interest. This usually lasts two to five years, and at the end, you can choose to buy the asset outright by paying a final lump sum.
Who Should Choose Commercial Hire Purchase?
CHP is a great option for businesses needing expensive equipment or vehicles but want to spread the cost over time. It’s especially good for:
- Businesses aiming for ownership: Perfect for companies planning to own the equipment at the end of the term, without the big upfront cost.
- Organisations wanting to spread expenditure: Great for businesses looking to manage cash flow by breaking the asset’s cost into regular payments.
- Companies looking for tax benefits: Ideal for businesses that can claim depreciation and interest as tax deductions.
- Enterprises with fluctuating cash flow: Suitable for businesses needing flexibility with payment terms to accommodate income variations.
- Businesses wanting to preserve capital: Perfect for companies looking to maintain their funds for other investments or expenses.
Benefits of Commercial Hire Purchase
Choosing CHP can offer several advantages, such as:
- Improved Cash Flow Management: By spreading the cost of an asset over its useful life, businesses can manage their cash flow better without significant initial expenditure.
- Tax Efficiency: The interest component of the payments is tax-deductible, and businesses can also claim depreciation on the asset.
- Flexible Payment Terms: CHP agreements can be tailored with flexible terms, including balloon payments that align with business cash flows.
- Path to Ownership: At the end of the agreement term, the business has the option to purchase the asset outright, often for a nominal amount.
- No Asset Depreciation Worries: Since the asset is owned and sold by the financier until the final payment, businesses don’t need to worry about the depreciation risk.
What is Chattel Mortgage?
A chattel mortgage is a finance deal that lets a business buy a vehicle or equipment straight away with funds borrowed from the lender. Unlike CHP, the business owns the asset from day one, and the loan is secured against it.
How Does it Work?
In a chattel mortgage, the business gets the asset using borrowed funds but owns it from the start. The lender takes a mortgage over the asset as security for the loan. Once the loan is paid off, the lender’s interest is removed, and the business has full ownership.
Who Should Choose Chattel Mortgage?
Chattel mortgage is great for:
- Businesses needing immediate ownership: Perfect for businesses that need to own the asset right from the start for operational or financial reasons.
- Companies that can claim GST: Great for businesses registered for GST who can claim it upfront on the asset purchase, helping cash flow.
- Organisations with stable cash flow: Ideal for businesses with reliable income that can handle regular, fixed repayments.
- Firms planning to use the asset long term: Best for businesses that plan to keep the asset after the loan term and want to own it from the start.
- Businesses seeking tax benefits: Good for businesses that can claim interest and depreciation on the asset for tax deductions.
Benefits of Chattel Mortgage
Choosing a chattel mortgage comes with some solid perks:
- Own the Asset Right Away: You own the asset from day one, which helps with depreciation and getting the most out of it.
- Tax Perks: You can claim GST on the purchase upfront and get tax breaks on interest and depreciation.
- Flexible Loan Terms: Chattel mortgages offer flexible terms and repayment options to match your business’s financial needs.
- No GST on Repayments: Unlike leases, no GST is added to your repayments, which means lower regular payments.
- Keep Your Capital: The loan covers the cost of the asset, so you can keep your capital free for other needs.
Factors to Consider When Choosing Between Commercial Hire Purchase vs Chattel Mortgage
When you’re weighing up commercial hire purchase (CHP) vs chattel mortgage, there are a few things to think about:
Financial Stability
If your business has steady cash flow, a chattel mortgage might be the way to go since it gives you immediate ownership and the perks of depreciation. But if your cash flow is a bit unpredictable, CHP lets you spread the cost out over time, making things easier to manage.
Tax Considerations
How you handle taxes is another factor. If you want to claim GST upfront and take advantage of faster depreciation, a chattel mortgage is a good pick. If spreading your tax deductions over time suits your business better, CHP might work for you.
Need for Ownership
If you need the asset right away to use as collateral or for other reasons, chattel mortgage gives you ownership from day one. If you’re happy to wait until the final payment is made, then CHP could be the better option.
Impact on Financial Reporting
How you report your assets is important too. A chattel mortgage could help boost your balance sheet and borrowing power because you own the asset from the start. CHP might be better for businesses looking to keep things a bit simpler on the reporting side.
Payment Flexibility
Consider how each option’s payment terms line up with your business’s financial plans. CHP offers flexibility with payment structures, like balloon payments, while chattel mortgage tends to have fixed repayment terms that might cost less overall.
Final Thoughts
In the end, choosing between CHP and chattel mortgage depends on a few things: how quickly you need ownership, your cash flow and your approach to taxes and reporting. If lower upfront costs and spreading tax benefits out suit you, CHP might be the way to go. But if owning the asset straight away and claiming GST upfront is a priority, chattel mortgage could be a better fit. Think about your goals and finances to decide which option works best for your business.
