Chattel mortgage vs rental

Convenient asset financing solutions to free up working capital

One of the most demanding aspects of running a business is the efficient management of cash flow. And with major purchases sometimes making significant dents in readily available funds, it’s important to consider viable asset financing options. But necessary purchases are just that: necessary for operating and growing the business. Many businesses try to avoid lump sum capital expenditure and consider alternative financing when looking to purchase capital items such as motor vehicles, trucks, plant & machinery.  Two of the more common financing options are known as chattel mortgage and rental (operating lease) agreements. Both methods of acquiring assets allow businesses to arrange flexible terms involving regular, fixed (usually monthly) payments. Each option has its own potential advantages and disadvantages – and different implications for GST and tax.

Chattel Mortgage

When a business takes out a chattel mortgage, it borrows a set amount for the purpose of buying specific goods – such as, for example, equipment related to the operation and development of the business. This type of loan is also commonly known as a Specific Security Agreement. It is different from a secured bank loan because only the goods financed are put up as security against the repayment of the loan, not the business’ present (and possibly future) assets.

Pros:

• Businesses can customise the loan. They can borrow the amount they need, or choose to put down a deposit and borrow funds to cover the balance; they can also structure payments to suit their needs at various points in the loan period.
• Borrowed funds are directly invested into assets that the business owns.

Cons:

• The business has full title to the goods only when the term of the mortgage ends.
• The business carries liability as owner and user of the goods.

Tax and GST implications:

• After securing a chattel mortgage, GST credit can apply to the full purchase price of goods.
• Businesses can claim tax deductions for interest paid, and for depreciation of the assets.

Rental Agreement

Under a rental agreement, the financial provider purchases and owns the assets, and rents them back to the user. The business takes possession of goods for a fixed period, and pays for the privilege of using them. After the rental period, the business might opt to buy the goods, extend the rental period, or begin another agreement to rent new goods.

Pros:

• A business can rent special-use equipment it might need for only a short while, without making a major investment.
• There is always the option to upgrade to the latest products; this is particularly attractive if goods depreciate rapidly or if, because of continuous improvements in technology, equipment quickly becomes obsolete.
• Rental agreements allow businesses to avoid unknown and residual risks; the owner, in this case the financial provider, carries the risk instead.

Cons:

• The business does not own the goods when the agreement ends.

Tax and GST Implications:

In rental agreements, GST credit and tax deductions can apply to monthly payments made during the reporting period. When they need to purchase essential equipment, more and more businesses are choosing to free up their working capital by exploring the pros and cons of available financing options to suit the specific needs of the business. ~ GetCapital offers a comprehensive range of asset financing solutions, including a chattel mortgage product that provides businesses with maximum flexibility surrounding loan amount, term, structure and multiple tax advantages due to asset ownership. The application process is easy and convenient, with 24-hour approvals and quick funding.