When your business needs a vehicle, machinery or other equipment, there are several ways to fund the purchase. Two common options are chattel mortgages and hire purchase agreements.
Both can allow a business to acquire an eligible asset while spreading the cost over an agreed period, but the way ownership and finance are structured is different.
Under a chattel mortgage, the business generally takes ownership of the asset when it is purchased, with the lender taking security over the asset. With hire purchase, the financier generally owns the asset during the agreement, with ownership passing to the business once the agreement is completed according to its terms.
So, which option is better?
There isn’t one answer for every business. The more appropriate structure can depend on the asset you’re buying, how you use it, your cash flow, accounting and tax circumstances, and the lender’s requirements.
Chattel mortgage vs hire purchase at a glance
The key difference comes down to ownership during the finance term.
| Chattel mortgage | Hire purchase | |
| Ownership | Business generally owns the asset from purchase | Financier generally owns the asset during the agreement |
| Security | Asset is used as security for the loan | Asset remains with the financier until ownership conditions are met |
| Business use | Business can use the asset during the loan | Business can use the asset during the agreement |
| Repayments | Regular repayments over an agreed term | Regular repayments over an agreed term |
| Balloon option | May be available, subject to lender | May be available, subject to lender |
| End of term | Loan is paid out and security is released | Ownership generally passes after the required payments/conditions are met |
| Common uses | Vehicles, machinery and equipment | Vehicles, machinery and equipment |
The exact terms, fees, repayment structures and end-of-term arrangements can vary between lenders and products.
What is a chattel mortgage?
A chattel mortgage is a type of secured business finance commonly used to purchase vehicles and equipment.
The business purchases the asset and generally owns it from the beginning of the finance arrangement. The lender takes a security interest over the asset until the finance is repaid.
For example, a business purchasing a commercial truck could use a chattel mortgage to fund the purchase rather than paying the entire purchase price from available cash. The business then makes repayments over the agreed loan term.
Once the loan has been fully repaid, including any applicable balloon payment, the lender’s security interest can be released.
Chattel mortgages are also sometimes referred to as equipment loans or goods loans, depending on the lender.
When might a chattel mortgage be considered?
A chattel mortgage may be worth considering when a business:
- Wants ownership of the asset from the beginning
- Is purchasing a vehicle or equipment for business use
- Wants to structure repayments over a set period
- Wants to consider a balloon payment
- Has sufficient cash flow to meet the proposed repayments
- Wants to use the financed asset as security
Whether it is suitable depends on the individual business and lender criteria.
What is hire purchase?
A commercial hire purchase is another way for a business to acquire an asset through finance.
Under a typical hire purchase arrangement, the financier purchases the asset and the business takes possession and uses it while making the agreed repayments.
Ownership generally passes to the business once the agreement has been completed and the relevant purchase conditions have been satisfied.
This means the business can use the vehicle, machinery or equipment during the finance term without owning it outright from the beginning.
When might commercial hire purchase be considered?
Hire purchase may be relevant when a business:
- Needs to acquire a vehicle or equipment
- Wants to spread the purchase cost over time
- Doesn’t require ownership from the beginning
- Wants a structured repayment arrangement
- Wants to consider available end-of-term options
The specific terms depend on the lender and finance agreement.
Chattel mortgage vs hire purchase: the main differences
While both can be used to finance business assets, the differences become clearer when you look at how each arrangement works.
1. Who owns the asset?
This is the fundamental distinction.
With a chattel mortgage, the business generally owns the asset from the time of purchase, while the lender holds security over it.
With hire purchase, the financier generally owns the asset during the agreement. Ownership transfers to the business after the required payments and conditions have been met.
The Australian Taxation Office recognises this distinction in its guidance on chattel mortgages and hire purchase arrangements.
2. How is the asset secured?
With a chattel mortgage, the asset itself generally acts as security for the finance. This means the lender has a security interest in the vehicle, machinery or equipment until the loan is repaid.
With hire purchase, the financier retains ownership of the asset during the agreement, providing security through its ownership interest.
3. What happens at the end of the term?
With a chattel mortgage, the business generally owns the asset once the loan and any applicable balloon payment have been paid and the lender’s security has been released.
With hire purchase, ownership generally transfers to the business once the agreement reaches its required completion point and the relevant payments or purchase conditions have been satisfied.
Always check the specific contract because end-of-term arrangements can differ.
Chattel mortgage vs hire purchase: which may suit different businesses?
Rather than asking which finance structure is universally better, consider which one aligns more closely with your business requirements.
A chattel mortgage may suit a business that wants ownership upfront
A business that wants to own its vehicle, machinery or equipment from the beginning may consider a chattel mortgage.
For example, a construction company purchasing an excavator for long-term use may prefer a structure where the business owns the asset while making repayments.
Hire purchase may suit a business comfortable with ownership at the end
A business that wants to use an asset during the finance term but is comfortable with ownership transferring after completion may consider commercial hire purchase.
For example, a business purchasing specialised production equipment may prefer to spread the cost while using the equipment in its operations.
These are examples rather than rules. The appropriate structure depends on the individual circumstances.
What about balloon payments?
A balloon payment is a larger amount scheduled to be paid at the end of a finance arrangement. Depending on the product and lender, a balloon or residual amount may be available with business asset finance.
The main attraction is that a balloon can reduce the size of regular repayments during the finance term. However, it also creates a larger payment obligation at the end.
For example, instead of paying the entire financed amount through regular instalments, part of the amount can remain payable as a final balloon.
A business considering a balloon should look at:
- The balloon amount
- Regular repayment amount
- Total interest and finance costs
- Expected cash flow at the end of the term
- Whether the business expects to retain the asset
- Whether refinancing may be required
A lower monthly repayment does not necessarily mean the finance will cost less overall.
GST and tax considerations
GST and tax treatment can be an important part of comparing finance structures.
For eligible business purchases, a GST-registered business may be able to claim input tax credits, subject to the relevant GST rules, the business use of the asset and other requirements.
The ATO provides specific guidance on GST treatment for both chattel mortgage and hire purchase arrangements.
Tax deductions can also depend on the finance structure and circumstances. Interest, depreciation and other costs may receive different treatment depending on the arrangement and how the asset is used.
Because tax outcomes depend on your individual circumstances, it’s important to discuss the transaction with your accountant or registered tax adviser before relying on a particular tax treatment.
What about the Instant Asset Write-Off?
The Instant Asset Write-Off (IAWO) may be relevant to eligible businesses acquiring qualifying assets, subject to the applicable rules, thresholds and tax-year requirements. The way an asset is financed does not automatically determine whether it qualifies.
Eligibility can depend on factors including:
- The business
- The asset
- Asset cost
- Business use
- Date of purchase and use
- Applicable tax rules
IAWO rules can change, so businesses should confirm current eligibility with the ATO or their tax adviser before making a finance decision based on a potential deduction.
How MorFin Group can help
Comparing business finance structures can be difficult when lenders use different terminology and offer different terms.
MorFin Group takes an education-first approach to finance, helping businesses understand the options available before making a decision.
With access to 25+ banks and lending institutions, we can help you explore relevant finance structures for eligible vehicles, machinery and equipment.
Our approach starts with understanding:
Your business → Your asset → Your finance requirements → Your available options
From there, we can help you understand the differences between available structures and navigate the lending process.
Conclusion
Chattel mortgages and commercial hire purchase can both provide ways for businesses to acquire vehicles, machinery and equipment without paying the full purchase price upfront.
The key difference is generally when ownership passes to the business. With a chattel mortgage, the business generally owns the asset from purchase, while with hire purchase, ownership generally transfers after the agreement’s requirements have been completed.
Beyond ownership, consider repayments, total finance costs, balloon payments, cash flow, tax and GST treatment, asset life and lender requirements.
MorFin Group can help you understand your business finance options and explore relevant lending solutions through access to 25+ banks and lending institutions.
Frequently asked questions
Is a chattel mortgage better than hire purchase?
Neither is automatically better. A chattel mortgage may suit businesses wanting ownership from the start, while hire purchase may suit those comfortable with ownership transferring at the end.
What is the main difference between chattel mortgage and hire purchase?
The main difference is ownership. With a chattel mortgage, the business generally owns the asset from purchase. With hire purchase, the financier generally owns it during the agreement.
Is commercial hire purchase the same as hire purchase?
Commercial hire purchase is a hire purchase arrangement used for business or commercial assets. Terms vary between lenders.
Can I use a chattel mortgage to buy a truck?
Potentially. Chattel mortgages can be used for eligible business vehicles, including trucks, subject to lender criteria.
Can I use hire purchase for machinery?
Yes, eligible machinery and equipment may be financed through commercial hire purchase, depending on the lender.
Can I have a balloon payment with a chattel mortgage?
Some chattel mortgage arrangements may include a balloon payment, which can reduce regular repayments but creates a larger final payment.
Can hire purchase have a balloon payment?
A balloon or final payment may be available depending on the lender and finance structure.
Which option is better for cash flow?
Both can spread asset costs over time. The impact depends on the loan amount, term, repayments, fees, interest rate and any balloon payment.
Can I claim GST on a chattel mortgage?
A GST-registered business may be able to claim an input tax credit for an eligible business purchase, subject to the relevant GST rules.
Can I claim GST on hire purchase?
GST treatment can apply to eligible hire purchase arrangements, but the timing and amount can vary. Speak with your tax adviser about your circumstances.
Can a new business use a chattel mortgage or hire purchase?
Potentially. Lenders may consider the business’s experience, financial position, asset and ability to service the finance.
Should I choose based on the lowest monthly repayment?
Not necessarily. A lower repayment can result from a longer term or balloon payment. Compare the overall finance cost and structure.
How can MorFin help compare chattel mortgage and hire purchase?
MorFin Group can help you understand both structures and explore relevant options across 25+ banks and lending institutions based on your business and asset requirements.