A chattel mortgage, rent-to-own arrangement and hire purchase can all be used to fund business equipment, but they work differently when it comes to ownership, repayments, tax treatment and what happens at the end of the agreement.
For Australian businesses purchasing trucks, machinery or other commercial equipment, the biggest distinction is often ownership.
With a chattel mortgage, the business purchases and owns the asset from settlement while the lender registers security over it.
With a typical rent-to-own arrangement, the provider generally owns the equipment during the rental period, with ownership potentially transferring later under the terms of the agreement.
Traditional hire purchase follows another structure where the finance provider generally owns the asset during the agreement and ownership transfers according to the contract once the required payments and conditions have been completed.
The Asset Finance Shop (TAFS) primarily arranges chattel mortgage finance for eligible commercial vehicles, machinery and business equipment.
This guide explains the differences between chattel mortgage, rent to own and hire purchase, including ownership, repayments, cash flow and potential tax treatment.
A chattel mortgage is a commercial asset finance structure used to purchase a business vehicle, machine or piece of equipment.
The word "chattel" refers to the asset being financed.
This could include:
Under a chattel mortgage:
The key point is that ownership begins at settlement.
Consider a construction business purchasing an excavator for $180,000.
The finance could be structured as:
Purchase price: $180,000
Deposit: $20,000
Amount financed: $160,000
Finance term: Agreed with the lender
Balloon: Optional, subject to lender criteria
The business owns the excavator from settlement.
The lender holds security over the machine while the finance remains outstanding.
Once the loan is repaid, the lender's security is removed.
The excavator remains the property of the business.
Rent to own generally allows a business to use equipment while making regular rental payments under an agreement that may provide a pathway to ownership later.
Under a typical arrangement:
The exact structure depends on the contract.
That makes it important to check:
TAFS primarily focuses on chattel mortgage finance rather than rent-to-own equipment finance.
Traditional hire purchase is another way businesses may fund equipment.
Under a hire purchase agreement, the finance provider generally owns the asset during the agreement.
The business uses the equipment and makes agreed payments.
Ownership generally transfers once the terms of the agreement have been completed.
The exact contract can vary, so businesses should review the agreement carefully.
TAFS primarily arranges chattel mortgage finance rather than hire purchase.
The main differences can be summarised as follows.
|
Feature |
Chattel Mortgage |
Rent to Own |
Hire Purchase |
|
Business owns asset from settlement |
Yes |
Generally no |
Generally no |
|
Initial owner |
Business |
Provider |
Finance provider |
|
Business uses asset |
Yes |
Yes |
Yes |
|
Regular payments |
Finance repayments |
Rental payments |
Hire purchase payments |
|
Lender/provider interest |
Lender registers security |
Provider generally owns asset |
Provider generally owns asset |
|
Ownership later |
Business already owns it |
May transfer under agreement |
Generally transfers under agreement |
|
Deposit may be available |
Yes |
Depends on agreement |
Depends on agreement |
|
Balloon may be available |
Yes, subject to lender |
Depends on agreement |
Depends on agreement |
|
Main equipment structure arranged by TAFS |
Yes |
No |
No |
The biggest difference is ownership.
The business owns the equipment from settlement.
The provider generally owns the equipment during the rental period.
That distinction can matter if the business:
For a business purchasing an income-producing asset it intends to retain, ownership from settlement can be an important consideration.
Again, ownership is the main distinction.
With a chattel mortgage:
The business owns the asset from settlement.
Under traditional hire purchase:
The finance provider generally owns the asset during the agreement.
Ownership generally transfers once the required payments and conditions have been completed.
The business should also compare:
A chattel mortgage.
This is one reason chattel mortgage is commonly used for commercial asset purchases.
The business purchases the asset and the lender takes security over it.
This can suit businesses purchasing equipment such as:
Ownership can affect more than what name appears on the asset.
It can influence:
That is why comparing finance structures purely by their monthly payment can miss important differences.
There is no single answer.
The strongest structure depends on:
A chattel mortgage can be structured to reduce the amount of cash required upfront.
The business might use:
Each choice affects cash flow differently.
Instead of paying the full purchase price in cash, the business can finance the equipment over time.
Consider a business buying a $150,000 machine.
The business uses:
$150,000 immediately
That money is no longer available for other business expenses.
The business finances some or all of the purchase and keeps more cash available.
That cash may be needed for:
The business pays finance costs in return for retaining more capital.
The decision should consider what that cash is worth inside the business.
Not automatically.
A larger deposit reduces the amount being borrowed.
For example:
Equipment price: $150,000
Deposit: $30,000
Finance required: $120,000
Compared with financing the full amount, the business generally has:
But it also has $30,000 less cash available.
For a transport business, that money might otherwise fund:
For an earthmoving business, it might fund:
The finance structure should balance debt reduction with working capital.
Potentially.
A balloon payment is an agreed amount of principal that remains outstanding at the end of the finance term.
For example:
Amount financed: $150,000
Term: 5 years
Balloon: $30,000
Leaving $30,000 outstanding generally reduces regular repayments.
The trade-off is that the business still owes $30,000 at the end.
A balloon should consider:
The lowest monthly payment is not automatically the best finance structure.
The business generally has:
The business generally has:
Neither structure is automatically better.
The right option depends on the business's cash flow and equipment plans.
Rent-to-own arrangements can spread the cost of using equipment over regular payments rather than requiring the business to purchase the asset outright.
However, businesses should look beyond the regular payment.
Compare:
A lower regular payment does not automatically mean the equipment costs less overall.
Hire purchase also spreads payments across an agreed period.
The business should understand:
The monthly commitment is only one part of the comparison.
Parts of a chattel mortgage transaction may potentially be deductible.
The full monthly repayment is not generally treated as one tax deduction.
A repayment typically includes:
The amount being repaid against the original amount borrowed.
The cost charged by the lender for providing the finance.
Eligible business-use interest may potentially be deductible.
The underlying asset may also be subject to depreciation or other applicable tax rules.
Speak with your accountant about the treatment that applies to your business.
Generally, no.
For example:
Monthly repayment: $3,500
The business should not automatically record a $3,500 tax deduction.
Part of that repayment reduces the principal balance.
Part represents interest.
The asset itself is then treated separately for tax purposes.
Your accountant can determine:
Potentially.
A GST-registered business may be able to claim an eligible GST credit on the business-use portion of the equipment purchase where the relevant requirements are met.
The GST treatment can depend on:
For example, equipment purchased from a GST-registered dealer may have a different GST position from equipment bought privately.
Potentially.
Because the business owns the asset, eligible depreciation may apply according to the applicable tax rules.
The depreciation period is separate from the finance term.
For example, financing a machine over five years does not necessarily mean the asset is depreciated over five years for tax purposes.
Your accountant should determine the correct treatment.
Not automatically.
A balloon generally represents principal left outstanding until the end of the finance term.
A larger balloon may affect:
It does not automatically create an additional deduction.
A balloon should be selected because it suits the finance strategy, not because of an assumed tax benefit.
The deposit primarily changes the amount borrowed.
For example:
Asset cost: $150,000
Deposit: $40,000
Finance: $110,000
The underlying asset still cost $150,000.
The tax treatment of the asset should be considered separately from how much of the purchase was financed.
Rent-to-own follows a different legal and ownership structure from chattel mortgage.
Because the provider generally owns the equipment during the rental period, the accounting and tax treatment can differ.
Businesses should not assume that:
The exact agreement should be reviewed by your accountant.
Hire purchase can also have different accounting and tax treatment from a chattel mortgage.
The exact treatment depends on:
Tax should be one consideration rather than the only reason for choosing a finance product.
TAFS can help structure the commercial asset finance while your accountant advises on tax treatment.
It depends on what the business needs.
A chattel mortgage can suit a business that:
Rent to own follows a different ownership structure and may suit businesses looking for a different form of equipment access.
The agreement itself needs to be compared carefully.
It depends on the business and agreement.
For a business that wants ownership from settlement, a chattel mortgage provides that structure.
The business should still compare:
There is no reason to choose a finance structure based only on its name.
Compare the complete financial outcome.
A chattel mortgage can be a strong fit for businesses that know they want to purchase and retain an asset.
This could include:
Because the business owns the asset from settlement, there is no later ownership transfer required.
The answer depends on how the business manages its asset replacement cycle.
Important questions include:
A chattel mortgage can still be structured around a planned replacement cycle.
For example, an appropriate balloon may reduce repayments during the term while leaving a balance aligned with expected future value.
Yes.
Selected lenders finance used commercial assets.
The lender may consider:
Older equipment may have different term or balloon options from a new asset.
Potentially.
Selected lenders can finance equipment purchased directly from a private seller.
Additional checks may be required around:
A private sale can still be financed using a chattel mortgage where lender criteria are met.
Yes, through selected lenders.
An initial finance assessment before bidding can help establish:
Final approval depends on the asset purchased.
Yes.
Sole traders can apply for chattel mortgage finance for eligible business assets.
The lender may assess:
Potentially.
Selected lenders can consider newer businesses.
Where the business has limited trading history, the application may be supported by:
There is no single minimum ABN age used by every lender.
Potentially.
Selected lenders may assess eligible applications using:
instead of requiring a complete current set of financial statements in every case.
Low doc does not mean no assessment.
The lender still needs to understand whether the proposed finance can be supported.
Before choosing an equipment financing structure, compare:
Ask the same questions, with particular attention to ownership.
Check:
The agreement should suit how the business actually intends to use the asset.
Consider a civil contractor purchasing:
Excavator price: $200,000
Deposit: $20,000
Finance: $180,000
The business intends to operate the machine for several years.
Under a chattel mortgage:
The business retains more cash than it would if it purchased the machine outright.
A transport business purchases:
Prime mover: $250,000
Rather than paying the complete purchase price in cash, the business uses a chattel mortgage.
This allows it to keep more capital available for:
The truck belongs to the business from settlement.
The finance is then repaid according to the approved structure.
TAFS primarily arranges chattel mortgage finance for eligible commercial vehicles, machinery and business equipment.
TAFS can assess:
TAFS considers:
TAFS starts with a soft credit check that leaves no mark on the applicant's credit file.
The internal credit team assesses the application before the formal lender submission.
TAFS has access to more than 80 bank and non-bank lenders.
Different lenders can have different requirements around:
TAFS can review:
Once a suitable option is selected, the formal application is submitted to the chosen lender.
TAFS coordinates the remaining lender and seller requirements through to settlement.
A chattel mortgage is a commercial loan used to purchase a business vehicle, machine or piece of equipment.
The business owns the asset from settlement while the lender registers security over it until the finance has been repaid.
The main difference is ownership.
With a chattel mortgage, the business owns the equipment from settlement.
Under a typical rent-to-own arrangement, the provider generally owns the asset during the rental period and ownership may transfer later under the agreement.
With a chattel mortgage, the business owns the asset from settlement.
Under traditional hire purchase, the finance provider generally owns the asset during the agreement, with ownership transferring according to the contract once the required conditions have been completed.
A chattel mortgage.
The business purchases and owns the asset from settlement.
Parts of the transaction may potentially be deductible.
Eligible business-use interest may be deductible, while depreciation may apply to the asset.
GST credits may also be available where the relevant requirements are met.
Speak with your accountant about your circumstances.
Generally, no.
The repayment normally includes principal and interest.
The principal reduces the amount borrowed.
Eligible interest may potentially be deductible.
Potentially.
A GST-registered business may be able to claim an eligible GST credit on the business-use portion where the relevant requirements are satisfied.
Potentially.
Because the business owns the asset, eligible depreciation may apply according to the relevant tax rules.
The tax treatment depends on the agreement and the business.
Do not assume all rental payments receive the same tax treatment in every arrangement.
Ask your accountant to review the agreement.
The tax treatment depends on the hire purchase agreement, business use and applicable tax rules.
Speak with your accountant before choosing the structure based on tax treatment.
Not automatically.
A balloon changes the finance repayment structure but does not automatically create an additional deduction.
It depends on the business.
A chattel mortgage can suit businesses that want to own the equipment from settlement and repay the purchase over time.
It depends on the business and agreement.
For businesses wanting ownership from settlement, a chattel mortgage provides that structure.
Yes.
Selected lenders finance eligible used commercial vehicles, machinery and equipment.
Potentially.
Selected lenders can finance eligible private-sale equipment, although additional seller and asset checks may be required.
Yes, subject to lender approval.
Potentially.
Selected lenders consider newer businesses based on the complete application.
Potentially.
Selected lenders can consider eligible applications using bank statements and other supporting business information rather than requiring complete financial statements in every case.
TAFS primarily arranges chattel mortgage finance for eligible commercial vehicles, machinery and business equipment.
Rent to own and hire purchase are discussed here to help businesses understand the differences between equipment finance structures.
The main difference between chattel mortgage, rent to own and hire purchase is when your business owns the equipment.
For businesses that want to own an income-producing asset from settlement, a chattel mortgage can provide a straightforward way to purchase equipment while spreading the cost over an agreed finance term.
TAFS can review the business, asset, purchase price, available deposit, trade-in position, finance term and balloon before comparing suitable chattel mortgage options through access to more than 80 bank and non-bank lenders.
The Asset Finance Shop (TAFS) is a commercial asset finance brokerage based in Sydney.
Information on this page is general in nature and doesn't take your personal circumstances into account. Speak to a TAFS broker for options tailored to your business, and to your accountant regarding tax treatment.