A chattel mortgage is an asset finance facility commonly used by businesses to finance their equipment and work vehicles. A chattel mortgage can provide businesses with flexibility around repayments and potential tax benefits. If you’re in the construction industry here’s some examples of how a chattel mortgage could help you. Be sure to speak with your accountant to understand how a chattel mortgage may benefit your specific business.
Case study 1: Upscaling your business
Dave runs an earthmoving business and has just received a new contract for site works on a new residential subdivision. The work will include site cut, excavation, drainage, rock removal and bulk earthworks. With his current fleet tied up at existing job sites Dave will need to scale up his business in order to take on this new contract. Dave decides his business will need another excavator and tip truck. After shopping around Dave finds a new excavator for $150,000 and a tip truck for $100,000. However, without the cash readily available Dave considers financing the equipment through a chattel mortgage.
Under a chattel mortgage the excavator and tip truck will serve as the security for the loan. Repayments for the loan can be structured over a range of terms, usually 1-5 years. A fixed rate of interest will also apply.
Unlike a hire purchase, a chattel mortgage will give Dave full ownership of the equipment at the time of purchase. The excavator and tip truck will appear as assets on his business’ balance sheet, with the loan as a liability. This can provide some tax advantages for his business. As Dave uses the equipment solely for business purposes, he may be able to claim the depreciation on the equipment up to the depreciation limit for the current tax year. He may also be able to claim the interest expenses on the loan.
Additionally, Dave’s business is also registered for GST. Dave’s business accounts for GST on a cash basis so he may be able to claim the GST paid on the equipment as an input tax credit when he lodges his next Business Activity Statement (BAS).
By using a chattel mortgage Dave has been able to grow his current fleet without tying up any capital. This solution has helped to grow Dave’s business and has enabled him to take on the new contract.
Case study 2: Investing in your own assets
John is a concreter and has been running his concreting business for 10 years now. John always hires a pump for his jobs however with the number of jobs John is winning costs are starting to add up. John also wants to be in control of his schedule and is worried that there may not always be a pump truck available when he needs it. With his business growing he has decided to invest in purchasing his own concrete pump truck. John finds a concrete pump truck for $250,000. He chooses to take out a chattel mortgage in order to finance the purchase.
By using a chattel mortgage John is able to purchase his own pump truck without tying up the business’ capital. As he has ownership over the pump truck he may be able to claim depreciation and interest costs based on the level of business use.
Additionally, John chooses to set up a balloon payment at the end of the loan term. A balloon payment is a lump sum amount that is paid at end of the loan agreement. The higher the balloon payment, the lower his regular repayments will be. This flexibility can help John manage his cash flow and meet his repayments over the loan term.
Talk to a Suitable Loans Asset Finance Broker today.