As equipment lenders, we are regularly asked by customers which is the best or most popular form of finance. To finance new equipment, businesses can select from a number of different types of commercial loans. These include Equipment Lease, Equipment Hire Purchase, Rent to Own and Chattel Mortgage Equipment Finance.
Arriving at a decision as to which of these is the most appropriate for an individual operation involves a range of considerations including the financial goals of the business, balance sheet strategy and accounting methods and practices. An accountant or financial advisor that has a close understanding of the business operation is best-placed to assist with this decision. What works for one business may not suit the goals of another.
While our role as lender is not to advise business owners on the choice of loan type, we can share that Chattel Mortgage is definitely one of the most popular forms of equipment finance for Australian businesses. While already suited to many operations, Chattel Mortgage Equipment Finance has a growing appeal and up-take as businesses seek to realise the tax benefits of accelerated asset depreciation measures.
We explain some of the reasons why Chattel Mortgage is so popular for equipment finance right now and how this form of finance can present a workable proposition for businesses of many types and sizes.
Chattel Mortgage Equipment Finance: Key Features
By definition, the equipment or goods are the chattel and the loan is the mortgage. A number of banks and other lenders refer to Chattel Mortgage as Equipment Loan or Heavy Equipment Loan. This is the same loan type as Chattel Mortgage, just a more simplistic description.
The finance structure is quite straightforward – the equipment being acquired is used as the guarantee or security for the loan and the borrower repays the finance over a fixed loan term in fixed monthly repayments.
On settlement of the finance contract and purchase, the business accepts ownership of the equipment both physically and in accounting terms. That means, the equipment is posted to the accounts/balance sheet of the buyer. This is the key aspect which differentiates this form of finance from say Lease and which makes it suitable for accelerated asset depreciation measures.
As with other commercial finance products, a balloon is an option. To see how a balloon works to vary the repayment amount, use our Equipment Finance Calculator. Leave all figures constant and change the balloon amount to see how that effects the repayment level.
Appeal of Lowest Rate of Interest
One aspect of Chattel Mortgage which is sure to attract much attention is the interest rate. This form of finance attracts the lowest interest rate compared with Lease and Rent to Buy. This is consistent across the equipment finance sector and reflects the secured loan format of this type of loan.
The RBA has kept the official cash rate on hold at the historic low rate of 0.5% for over a year and that has further enhanced the overall appeal of investing in new equipment.
While business owners may think opting for the lowest interest rate finance is a no-brainer decision, the entirety of the benefits to a business of each of the finance products should be considered in detail.
For example, while Chattel Mortgage has the lowest interest rate, this form of finance requires the equipment to be entered on a business balance sheet as an asset/liability. Some businesses may choose a different balance sheet strategy with Lease or Rent to Buy more suitable to achieve their objectives.
Use our Compare Interest Rates Calculator for a rough estimate on the difference in loan repayments when different finance products are used.
Accelerated Asset Depreciation Measures
Since being first introduced in April 2020 and then revised and amended several times, Instant Asset Write-Off and temporary full expensing have certainly contributed to the take-up of Chattel Mortgage Equipment Finance.
When claiming this tax measure, businesses can deduct the full purchase cost of eligible equipment in the same year it was acquired rather than having to realise only a small portion as a tax deduction each year through normal depreciation.
In order to be a depreciable asset, equipment must be on the balance sheet of the business meaning they must have ownership. This is the case with Chattel Mortgage but is not the case with Lease and Rent to Buy. With Lease and Rental, the asset/equipment remains under the ownership of the lender until the loan is finalised. This is an attractive benefit to businesses that are seeking to improve the appearance of a business balance sheet. But it means the equipment is not depreciable by the business.
Temporary full expensing is currently available for eligible business through this and next financial year.
Widely Suited and Flexible Finance
Many different types and sizes of operations and business structures are suited to Chattel Mortgage as a form of finance. This form of finance suits businesses that use cash accounting methods which includes a vast majority of Australian businesses.
It can be selected as a form of finance by SMEs, large corporations, family enterprises, partnerships and even new operators. For start-ups and ABN holders, Jade offers Low Docs and No Docs Equipment Finance options.
Chattel Mortgage can be used for the acquisition of a wide range of equipment, machinery and plant across all industries, which further adds to its appeal as a versatile form of finance.
Contact Jade Equipment Finance on 1300 000 003 for a quote on Chattel Mortgage finance for your equipment acquisition
DISCLAIMER: IF MISINTERPRETATIONS, MISREPRESENTATION OR ERRORS EXIST IN THIS ARTICLE, NO LIABILITY IS ACCEPTED. THE INFORMATION IS PROVIDED ONLY FOR GENERAL PURPOSES AND NOT IN ANY MANNER INTENDED AS THE ONLY SOURCE FOR MAKING FINANCIAL DECISIONS. THOSE THAT CONSIDER THEY REQUIRE ADDITIONAL GUIDANCE OR ADVICE SHOULD REFER TO AN INDEPENDENT FINANCIAL ADVISOR.