Get access to the business vehicles and equipment you need.
Commercial hire purchase is a flexible and affordable way to finance new assets that your business needs.
What is a Commercial Hire Purchase and how does it work?
A commercial hire purchase (CHP) involves a lender agreeing to purchase an asset (usually a vehicle) on behalf of the borrower and then hiring it back to the borrower over a set period of time. This means that the borrower is not legally the owner of the asset, however they have full use of it for the term of the contract.
Like many other financing arrangements, a commercial hire purchase allows the borrower to make monthly instalments towards the purchase of the asset without having to offload a significant amount of cash at the outset.
The interest rate will vary from lender to lender, but they generally remain fixed for commercial hire purchase arrangements.
At the end of the term, when the total price of the vehicle including the interest charges have been paid in full, the borrower may then become the legal owner of the asset. Much like Chattel Mortgages, the hired equipment is used as security against the loan. This can be a great finance option when you want to minimise upfront outlay on deposits or keeping repayments at a minimum is your top priority.
What is the difference between a Chattel Mortgage and a 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 with your business being the owner whereas with a commercial hire purchase, the bank or lender is the owner for the duration of the loan. You may want to consider the tax implications and depreciation of assets when it comes to choosing the right finance that will be the best fit for your overall business operations.
What assets can I purchase using a Commercial Hire Purchase?
Any asset that is used more than 50% of the time in your business to contribute to gross profit can be financed using a CHP. Some of the most common assets include:
- Work vans and utes
- Trucks, trailers, and caravans
How long is the term of a Commercial Hire Purchase?
The terms of a commercial hire purchase are generally quite flexible, though they may range between 1 and 5 years depending on the lender, the asset and your own unique circumstances.
What fees and charges are involved with a Commercial Hire Purchase?
The fees involved with a commercial hire purchase may be quite high compared to other equipment financing options, however fees will vary between lenders. It is important to consider the fees which may be involved with any financing arrangement as ongoing fees can affect the total amount you will pay over the term. Depending on the lender you apply with, you may need to pay:
- An upfront deposit
- An establishment fee
- Monthly maintenance fees
- Late payment fees
- Early repayment fees
- Early termination fees
The early termination fee is particularly relevant to a commercial hire purchase. This may be applied by the lender where the borrower decides they no longer require the financed asset and can be a substantial cost.
What tax and GST implications can I expect to pay on a Commercial Hire Purchase?
Where an asset is being used for business purposes, you may be able to claim a tax deduction on the loan interest charges, as well as on the depreciation value of the asset, up to the Depreciation Limit set by the Australian Tax Office.
GST is charged on the purchase price of the vehicle and, if your business is registered for GST on a cash basis, you may be able to claim this as an Input Tax Credit on your next Business Activity Statement (BAS).
Any fees will also incur a GST payment.
Benefits of using a Commercial Hire Purchase
- Greater flexibility – One of the most attractive features of this equipment financing arrangement are the flexible repayment options. Borrowers may choose to pay one initial large deposit and repay the loan over a short time frame or alternatively, they may wish to defer the repayments, paying off most of the loan at a later stage or utilise a balloon payment to help manage cash flow.
- Tax Benefits– Repayments can usually be claimed as a tax deduction. Additionally, depreciation may also be claimable at tax time, despite the equipment not being fully owned by the user yet.
- Automatic ownership upon full repayment – The vehicle is automatically transferred to the hirer for ownership upon completion of payment.
- Fixed interest rates– Have certainty that your repayments will remain the same over the course of the loan.
What is required to apply for a Commercial Hire Purchase?
Businesses, sole traders and self-employed individuals can all make use of a commercial hire purchase, provided the asset is used predominantly for business purposes, that is 51% of the time. Applicants need to be:
- At least 18 years
- 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 commercial hire purchase 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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