How To A Use Chattel Mortgage To Finance Your Business?

If you're a business owner in need of a new vehicle or equipment, you may be considering a chattel mortgage. This is the most popular type of business loan for small businesses when looking to purchase a vehicle or equipment (collateral) as it gives them the opportunity to expand or upgrade without impacting on working capital.

You may also be an individual who needs a vehicle for work. For example, a tradesman who uses their ute to take tools from one work site to another. Providing you use your vehicle predominantly for business purposes (51%) and have an Australian Business Number (ABN), you may qualify for a chattel mortgage.

A chattel mortgage works similarly to a traditional, fixed-rate home loan, but with one key difference: instead of using real estate as security, this type of loan uses the vehicle or equipment (the chattel). This can be any type of movable equipment or machinery, such as vehicles, tools, or office equipment.

What are the benefits of a Chattel Mortgage?

1. Ownership: Unlike other finance options, such as hire purchase or leasing, the business takes ownership of the equipment right away. This means the vehicle or equipment starts working for the business straight away and is recorded as an asset on the business's balance sheet.
2. Lower Interest Rate: As the loan is secured, the interest rate on a chattel mortgage is generally lower than an unsecured loan alternative such as a personal loan or car loan
3. Flexible Payment Structure: Repayments can be structured to suit your cash flow. Terms are generally 1 to 5 years but these may be flexible depending on the lender
4. Balloon or Residual Payment: A balloon or residual payment can be set at the end of the term to lower your monthly payment. The lower the repayment, the higher the balloon payment.

What is a balloon or residual payment?

Balloon payment: A balloon payment is a lump sum that is paid at the end of the loan term. This option can help to reduce monthly repayments but means a larger amount is owing at the end of the loan.

Residual value: The residual value or 'balloon' is set as part of the contract and is the minimum value that the lender expects the equipment to be worth at the end of the loan term. This amount is then used to calculate your monthly repayments.

At the end of the financed period, if there is a balloon payment, your business will have several options::

1. pay the balloon payment in full and retain the equipment
2. trade in the vehicle or equipment, entering into a new financial contract. The balloon payment is paid using the proceeds from the trade-in
3. retain the vehicle or equipment and refinance the balloon payment amount

What are the tax benefits of a Chattel Mortgage?

1. GST may be claimable on the purchase price of the equipment.
2. Interest charges: the interest paid on the chattel mortgage may be claimable as a tax deduction
3. Depreciation: your vehicle or equipment will depreciate in value over time. You may be able to claim the depreciation as a tax deduction. With the extension of the ATO's instant asset write-off scheme in 2022, eligible businesses may be able to claim immediate deductions on purchased assets.

We recommend speaking with your accountant for tax advice. As finance brokers, we are not qualified to give tax advice.

Applying for a Chattel Mortgage

The process for obtaining a chattel mortgage is similar to applying for any other type of business loan. The lender will consider your business's creditworthiness and ability to repay the loan.

If purchasing a vehicle, once the chattel mortgage is approved, the lender may register their interest in the asset with the Personal Property Securities Register (PPSR). This protects their interest in the event that you default on the loan and they need to repossess the property. Once paid off, the lender will remove their interest from the vehicle.

Like any financial contract, you should consider the terms and conditions including the fees and charges and comparison rates. By speaking with one of our finance brokers who specialise in equipment finance, they will compare rates and terms from a range of lenders and work with you to determine which product is best for your own personal circumstances.