Running your own business can be exciting and exhausting. So the last thing busy business owners need is complicated financial agreements. But that doesn’t mean most CEOs aren’t on the lookout for the best ways to skyrocket their business. And one of those ways is increasing your flexibility as a company through the acquisition of equipment that can help your business grow.
For many companies that means expanding their fleet of vehicles. And chattel mortgages are a great way for business owners to make this happen. A chattel mortgage is a popular choice for businesses as it means adding a car or piece of equipment to a company’s portfolio without a large initial outlay. It also means a business immediately owns and can use the vehicle or equipment from the start of the agreement.
But many people are confused by the name ‘chattel mortgage’. So let’s take a closer look at what it means:
What is the meaning of chattel mortgage?
The word ‘chattel’ is the stumbling block for most people. But it’s just an old word for the things you own. It’s items you or your business have bought that can be taken with you if you move. So, put simply, your chattels are your moveable goods.
For most businesses, moveable goods usually mean the equipment they use, including their vehicles. Things like cars, machinery or hardware are the items usually considered the ‘chattels’ of your business.
Now, we’ve established what a chattel could be, we’ll move on to what a chattel mortgage means.
A chattel mortgage is just a fancy term for a car or equipment loan. Some people call it a ‘goods loan’. But unlike an unsecured loan, you might get from the bank, this is a loan that’s secured on the car or business equipment. But in this type of financial agreement the item you’ve entered into an agreement for acts as security for the loan. The ‘chattel’ is a vehicle and the ‘mortgage’ is the loan to pay for it.
With a chattel mortgage, the lender provides the upfront funds for your business to purchase the car or equipment and you’ll agree on the repayment period. Your business makes monthly repayments according to your repayment schedule until the loan is paid off. At the end of the loan term, your company owns the vehicle or item outright.
It really is as simple as that. And if you pay a regular mortgage, the concept won’t be a new one - it’s just created for commercial vehicle purchases. And because of some of the tax breaks you can get, it’s not surprising that this is a popular choice of loan for businesses that want to accelerate their growth.
Now let’s move on to why chattel mortgages are so popular with business owners.
Chattel mortgage pros and cons:
For business purposes, chattel mortgages are a great way of expanding your assets without overreaching financially. Especially as having large lump sums available upfront for vehicle purchases is not something all businesses have access to. A chattel mortgage is sometimes the only way that a business can acquire the vehicle it needs and use it straight away.
But as with any type of financial agreement, there are options that may affect your business’s unique position in different ways. So it’s important to consider if a chattel mortgage is right for your business, right now.
So what exactly are the benefits of a chattel mortgage?
Many CEOs and finance directors consider a chattel mortgage to be the best vehicle financing option for businesses.
Why? Because many of the benefits are linked to tax breaks. For example, your business can claim back the GST – for the interest paid and depreciation value of the vehicle – at the end of the tax year. What’s more, your business can also claim the fuel input tax credit if your company is eligible. This makes a chattel mortgage much more attractive for businesses than a personal consumer loan.
Another plus for the buyer is in their ability to amortise the cost of the vehicle over time by agreeing with the broker to finance more than the cost of the vehicle. This means insurance and other associated costs can be written off over the duration of the repayment period. Of course, each business is different and tax deductions are dependent on using the vehicle for business purposes. So we’d recommend seeking independent tax advice to find out how a chattel mortgage can benefit your company in this way.
Business owners often prefer the financial flexibility offered by a chattel mortgage. These include options for companies to agree on lower or higher monthly repayments depending on their financial goals or circumstances. They can also add balloon payments which can be increased or decreased for greater flexibility over monthly repayments.
A balloon payment is a lump-sum amount payable at the end of the mortgage period. The benefit of adding a balloon payment to your chattel mortgage means you may be able to lower the monthly repayment amount. This is not something you could do with most car loans or an equipment loan as many financing agreements are simply not that flexible.
There is a certain level of security in the chattel mortgage because the vehicle shows up as a business asset as soon as the company takes possession. While outright ownership of the vehicle happens at the end of the repayment period, companies can make use of the vehicle for business purposes.
And as chattel mortgage providers cover the entire costs of the vehicle, companies aren’t required to tie up their capital with a downpayment. For growing companies, this means they can weigh up the monthly payments against other business expenditures. It also means businesses have the option to spread their investments. And if the company intends to lease the car, it may even make a profit on the purchase price. When a business is starting out or expanding small gains like this can really help with cash flow.
This type of finance option usually comes with a fixed interest rate and a fixed period for repayments. This may give your business some sense of security especially when planning your financial position long-term. It also helps that fluctuations in interest rates are not going to affect the repayment amount. But do be careful, not all contracts offer a fixed rate of interest so check that the interest rate is not variable.
What are the important factors to be aware of?
As with any finance agreement, it’s important to get your own independent tax advice. And as any tax deduction you make will be subject to scrutiny, it's important that you are clear about the appropriate business use your vehicle will be put to and to seek advice if you are unsure.
To engage in any credit activities you’ll need an Australian credit licence. But if you purchase vehicles for your business or have any sort of credit arrangement, this is unlikely to be a barrier.
Your company will not own the vehicle or equipment outright until the mortgage, including the balloon payment, has been completed. So, companies could lose the vehicle if repayments are not kept up.
If you opt to add a balloon payment to the mortgage, you have to make sure your business can cover the final amount. Having enough capital to cover the residual payment is essential for your company to claim full ownership.
There are unlikely to be monthly fees associated with a chattel mortgage but there may be additional fees (including monthly account-keeping fees) depending on your business’s financial situation. These need to be factored into the agreement, so we’d recommend using a chattel mortgage calculator to make sure it’s the right choice for your business.
If you’d like more information about whether a chattel mortgage or lease will be better for your business, read more here.
Is a chattel mortgage the same as a car loan?
Yes, it’s the same as a consumer-secured car loan but it's specially designed for commercial vehicles. The financier lends the funds to purchase the vehicle and the vehicle is considered the property of the buyer from the purchase date.
In the same way as a car acts as security for a consumer loan, your company takes out a mortgage on the vehicle which acts as security on the loan. Once the end of the term of regular payments and the balloon payment has been cleared, the car is owned outright by your company and the lender has no further interest in the vehicle.
And providing the vehicle is predominantly for business purposes this type of finance lease is appropriate.
Can you pay out a chattel mortgage early?
Circumstances vary for each agreement but, in general, the lender can allow you to pay off the full amount before the contract term is over. If this is allowed, you may be able to reduce the interest you need to pay, thus reducing the overall cost of the vehicle.
However, each agreement and lender is different. They may charge a fee that would make paying off the full amount before the end of the loan term of no financial benefit to your business.
It’s always best to be clear about your options before entering into the contract.
What happens at the end of a chattel mortgage?
Providing you keep up regular payments on any vehicle purchases, including a balloon payment, you’ll own your vehicle outright at the end of the term.
Are chattel mortgage payments tax deductible?
Consumer car leases are a legitimate deductible business expense. But the price of vehicles purchased through a chattel mortgage or a commercial hire purchase cannot be claimed as tax deductible.
However, you can claim the interest on the loan and the depreciation on the vehicle as deductible expenses and the end of your tax year.
Like any financial agreement, it’s best to go in with open eyes. And having as many options as possible allows you to choose the best option for your business. So if you’re interested in comparing your commercial vehicle lending options we’re happy to help.