Chattel Mortgage vs Lease vs Hire Purchase (CHP)

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Chattel vs Finance vs Lease vs Commercial Hire Purchase

The differences between a chattel mortgage, lease, and a hire purchase agreement are levels of asset ownership for the business and varying degrees of tax benefits each type of finance will afford the borrower. To compare the three, the first consideration is what kind of asset or assets you want to finance, and whether you require ownership of the asset.

You will also want to consider:

  • Interest and fees from various lenders
  • Whether you need to upgrade the asset during the term
  • The options available to you at the end of your term

You can finance vehicles, equipment, or machinery for a business through these types of commercial finance, but understanding how they work will help you decide which will benefit you and your business the most:

  • Chattel Mortgage - provides full ownership of the asset, and is often used by businesses to finance high-value vehicles and machinery.
  • Finance Lease - used to finance large machinery or medical equipment, this type of lease is long-term and offers the benefits of ownership without actually owning the asset.
  • Operating Lease - provides part-ownership of low-value assets, such as IT equipment or telecommunications equipment. Best used as a form of short-term finance, where the assets are expected to depreciate or become obsolete by the end of the lease term.
  • Commercial Hire Purchase - used for medium-value assets such as tools, equipment, and vehicles, and provides no immediate ownership, but the opportunity to own the asset at the end of the term.

Chattel Mortgage Advantages

A chattel mortgage provides full ownership of an asset, and will always be secured by the vehicle. As a relatively low-risk form of business finance, lenders will generally offer lower interest rates than borrowers may find on other types of vehicle loan.

A business can also potentially claim the initial purchase-price GST of the vehicle it chooses to finance, provided the business is registered for GST and operating on a cash basis.

Read more about the GST advantages of a chattel mortgage and how they work.

Chattel Mortage Uses

Hospitality - Restaurants and Cafes Fit-outs
Company Cars
Construction and Mining High-value equipment
Medical Fit-outs
Company Cars
Retail Fit-outs
Company Cars
Tradespeople Vehicles
Manufacturing Manufacturing equipment

Finance and Operating Lease Advantages

The main advantage of a finance lease is a lower interest rate in comparison to other types of equipment finance, while the main benefit of an operating lease is that your business can commonly upgrade the assets purchased within the lease period.

With a Finance Lease:

  • Your business will have both the use of business equipment and the benefits of ownership
  • The lender will have actual ownership of the asset
  • You may also be able to claim tax on your finance lease payments

Finance Lease Uses

Hospitality - Restaurants and Cafes Brewery equipment
Construction and Mining High-value equipment
Medical Medical Equipment
Retail Not often used
Tradespeople High-value tools
Manufacturing Manufacturing equipment

When using a finance lease, the asset or equipment won’t sit on your books as a business asset or liability. However, you’ll still be responsible for maintenance and operating costs associated with the asset, and responsible for any damage incurred or required repairs.

With an Operating Lease:

  • You can’t sell or modify the asset without the lessor’s permission
  • You can claim tax on your rental payments
  • Can upgrade the asset, so ideal for IT equipment

Operating Lease Uses

Hospitality - Restaurants and Cafes IT and Payment Systems
Construction and Mining Low-value equipment
Medical IT and Payment Systems
Retail IT and Payment Systems
Tradespeople Low-value tools
Manufacturing Not often used

An operating lease can be more cost-effective than paying cash on assets with a short lifespan. However, when the lease expires, the terms of that lease are void and the business will need to renegotiate the lease with the lender.

Commercial Hire Purchase (CHP) Advantages

The main benefit of using commercial hire purchase is that your business will own the asset at the end of the term; using a CHP can provide assets to a business where access to cashflow is more important than initial ownership of the asset. There are also certain tax benefits to using a CHP, and GST is not charged on either the monthly payments, or any residual remaining at the end fo the term.

The assets financed with a CHP are generally those with a medium-to-long lifespan and of medium value. As you’ll own the asset at the end of your term, a CHP isn’t ideal if you believe you will need to upgrade the asset throughout this period.

Commercial Hire Purchase Uses

Hospitality - Restaurants and Cafes Commercial kitchen equipment
Construction and Mining Mid-value equipment
Medical Office furniture
Retail Store furniture
Tradespeople Mid-value Tools
Manufacturing Not often used

Summary

The differences between these types of finance are levels of asset ownership and various tax benefits your business may be eligible to receive. Often, the type of asset - and its value or lifespan - will dictate the most appropriate type of finance; in general, a chattel mortgage will be most suitable for business vehicles.

You can apply for any of these forms of finance with a variety of lenders in Australia. Interest rates will vary between lenders, and are influenced by the type of finance you choose and assets you wish to purchase - secured forms of finance will present lower interest rates than unsecured finance.

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