When it comes to car and equipment finance, a chattel mortgage is a popular option among business owners and operators.
A chattel mortgage has a similar structure to a fixed-rate traditional home loan or mortgage and can be of great use to your business. Speak with an Amfin consultant today to learn how it can benefit your business.
What is a Chattel Mortgage?
A chattel mortgage or equipment loan is a loan used to purchase an item of movable personal property such as a car, a piece of agriculture or construction equipment, a boat or a mobile home. The property, or chattel, secures the loan and the lender holds ownership of the asset until it has been paid off.
How does a Chattel Mortgage work?
In a chattel mortgage the finance lender uses the asset purchased as security for the loan much like a traditional mortgage. Unlike a finance lease or commercial hire purchase however a chattel mortgage gives you ownership of the asset straight away and then you are able to pay off the loan from the income the asset may generate in your business.
If you are unable to meet you repayments, the lender is able to repossess the asset.
How long is the term in a Chattel Mortgage?
Loan terms for a piece of equipment or vehicle purchased with a chattel mortgage usually last for typically 2 – 5 . However that will vary depending on the asset and its operating life.
Chattel Mortgage vs Commercial Hire Purchase
A chattel mortgage and commercial hire purchase are quite similar but maintain some key differences in practice. Assets which are financed by a chattel mortgage, are generally placed on the books straight away whereas with a commercial hire purchase, the bank or lender is the owner for the duration of the loan.
What assets can be purchased under a Chattel Mortgage?
To put it simply anything that is a business asset that has a serial number. This includes:
- Farm & Agriculture equipment
- Construction equipment
- Mining equipment
- Medical equipment
- Manufacturing and Specialised equipment
Advantages of a Chattel Mortgage:
- Repayments can be structured over a range of terms – usually 2 to 5 years
- Interest rates are usually lower than unsecured loans and can be fixed or variable
- Repayments can be fixed at the same amount each month or can be structured to fit your seasonal cash flow requirements (fixed rate)
- You own the financed asset up-front, so it appears as an asset on your balance sheet as well as the finance showing as a liability
- A balloon or residual payment can be set at the end of the term to lower your monthly payments
- Potential Tax Benefits: with a chattel mortgage, the goods and services tax (GST) inclusive purchase price of the asset is financed and you’re entitled to claim an input tax credit up-front. You may also be able to claim interest and depreciation costs, depending on how much you use the asset for business (your accountant will be able to provide specific advice regarding the tax implications for you and your business)
Is my business eligible for a Chattel Mortgage?
Businesses, sole traders and self-employed individuals can all make use of a chattel mortgage, provided the asset is used for business purposes. Applicants need to be:
- At least 18 years old
- An Australian resident
- Have a good credit rating and not be going through the process of bankruptcy
- Have a valid Australian Business Number (ABN)
- Is registered for Goods and Services Tax (GST)
Most lenders will also require that the business has been trading for more than 12 months, however the minimum length of trade varies between lenders.
Assets which have a short life span are generally not well suited to a chattel mortgage since their value depreciates quickly and paying for the asset outright will often be cheaper.
How do I apply?
If you would like to know more or need assistance determining the best equipment financing solution for you, one of our experienced finance consultants are happy to assist, contact us today.
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