Do you need a vehicle for business purposes? One of the best business financing options you can find is a Commercial Hire Purchase (CHP).
This article will help you weigh the pros and cons of CHP compared with a normal car loan, study the criteria, and find out if it works for you.
What Is a Commercial Hire Purchase and How Does It Work?
A Commercial Hire Purchase is a company financed vehicle purchase on your behalf and in return, fixed monthly installments are set over a time agreed upon by you and the company. This arrangement allows your cash flow and expenditures to be more manageable and offers possible business tax deductions as well.
During the agreed timeframe, you are free to use the vehicle for your own benefit but technically the vehicle ownership belongs to the financing company. Once the term of repayment ends – the total price of the vehicle plus the interest is fully paid – the vehicle ownership is officially transferred over to you.
Here’s the flow of CHP applications for a business.
- Choose a vehicle
- Submit a CHP application to a financing company and provide the vehicle details
- Provide the necessary documents required by the financing company for approval
- Agree with the financing company about the term of repayments
- Complete your monthly repayments
- Own the vehicle officially.
What are the benefits?
Commercial hire purchase is beneficial for your business in terms of the following:
- The contract term is set from a year to a maximum of five years.
- Down payment may be required on the vehicle purchase which results in lower repayments.
- The contract may include residual value – low monthly repayments and larger end term repayment
- Tax deductions for vehicle purchase intended for business purposes
- Input Tax Credits when registered in GST
- Lower interest rates due to the vehicles collateral usage against the loan
- Outright option to pay the vehicle in full within the term
- Possibility of monthly payment adjustments making amends to your business cash flow cycle.
- Preserves your working capital
What are the drawbacks?
CHP also has its cons at some point. The cons include the following:
- Higher total payment for the hire purchased vehicle compared to an outright cash payment or a standard personal loan
- Vehicle ownership belongs technically to the finance company until fully paid
- Vehicle retrieval can be imposed by the lending company if payment obligations are not settled
- GST is charged under fees and interest payments
- Impractical for short-lived vehicles
- The vehicle’s operating cost, registration, insurance as well as maintenance is your responsibility.
Who would use CHP and what are the criteria?
CHP applies to a wide array of business assets. Self-employed persons, sole merchants, partnerships, ABN holders, employees who have a vehicle allowance, and companies are all eligible for commercial hire purchase. The only qualifying criterion is that the acquired vehicle must primarily or at least 50% of the time be intended for business use. This way CHP can help people generate income from using a vehicle that they are not required to buy outright.
How do repayments work?
Similar to some types of equipment finance, repayments in commercial hire purchases often offer flexible, custom-made repayment installments to the borrower. The repayments may be scheduled weekly, biweekly, or monthly at a term agreed upon a range of 12 to 60 months.
In repayments, you can opt to include a balloon payment — a residual amount paid as a lump sum — to lower the price of your regular monthly installments. In the same manner, having an initial deposit on a hire purchased vehicle will significantly decrease your monthly repayments.
During the final repayment for the loan term, you also have several options to choose from. You can either opt to settle the final payment and instantly own the vehicle – if a residual amount is not applicable, pay the residual amount, or renew a CHP by refinancing the residual amount.
For vehicles intended for business purposes, you may be able to claim tax deductions based on charges in the loan interest, and the vehicle’s depreciation value set by the Australian Tax Office.
Goods and Services Tax (GST) is a 10% tax paid to the Australian Taxation Office (ATO). GST is collected in advance on the interest charges and repayment fees under a CHP agreement. If the hirer is GST registered on a cash basis, Input Tax Credits can be applied to claim the GST carried in the vehicle for the next Business Activity Statement. A tax deduction is also applicable for vehicles primarily used for business purposes.
Comparison to a Car Loan
Car loans work differently depending on the loan type you choose and the type of vehicle you opt to purchase. In general, normal car loans follow these steps:
- Finance application
- Loan approval
- Vehicle purchase
The main difference between CHP and a normal car loan is that the finance company buys the car on behalf of the borrower, letting the interested customer hire it back in terms of a contract. The contract stipulates all the aspects that you and the financier agreed upon, specifically the interest rate, amount of repayment, and payment frequency. In CHP, the purchased car can be used instantly, but the ownership belongs to the company until full repayments are done.
CHP is a loan option designed for business owners as they are not forced to touch their principal just to buy a car. It allows their cash flow to run smoothly while easily paying manageable monthly installments for the loaned car.
Business Finance Alternatives to a CHP
A commercial hire purchase can be a good option to purchase a car for business use. But there are also other business finance products that can help you, should CHP don’t fit your current business needs. You may want to consider a chattel mortgage or a car lease as an alternative. For individual employees, they can opt for cost-effective finance options including a chattel mortgage, a novated lease, or a car loan.
Whether you are opting for a CHP or other business finance alternatives, Aussie Car Loans can help you purchase the vehicle that you need. We can provide you with the right car finance product tailored to your specific requirement with a competitive fixed price and flexible loan terms.