Written byShaun McGowan
Commercial hire purchase is business finance used to acquire an asset from a lender and pay for it over a fixed period of time. Using a CHP will not provide a business with ownership of the asset until payments are complete — however, spreading payments across the term can free up cash flow for other business expenses.
Shopping around for the right loan can save you thousands of dollars in interest and fees.
A Commercial Hire Purchase is a type of business loan used to purchase an asset from a lender by making scheduled repayments over a set period of time. At the end of the term, the borrower will make a final payment and take ownership of the asset.
This type of finance may also be called a Corporate Hire Purchase, CHP, or HP. It allows you to get the benefit of the asset whilst protecting your business cash flow.
Businesses, sole traders and self-employed individuals can all make use of commercial hire purchase, provided the asset is used predominantly for business purposes. This means at least 50% of the time. The borrower will benefit if they don’t need to purchase the asset outright or own the asset immediately, but can still generate income from its use.
As a CHP frees up cash flow on medium-value assets, it is often used by hospitality businesses to finance commercial kitchen equipment. While the majority of lenders offering a commercial hire purchase will focus their product around vehicle finance, a CHP can be used to finance many types of business assets.
Under a Commercial Hire Purchase arrangement, the lender agrees to purchase the asset on behalf of the customer, who will then hire the asset from the lender over a fixed term. A CHP is similar to other types of equipment finance and:
The customer has free use of the asset while making repayments, but will not technically own the asset until the finance amount is repaid. At the end of the contract term — when the total price of the asset (minus any residual) and all interest has been paid in full — the customer will take full ownership.
A CHP can be suitable for businesses registered for GST on a cash accounting basis, as they should be able to claim the asset’s purchase-price GST amount on their next Business Activity Statement (BAS).
Benefits of a commercial hire purchase include possible tax deductions if the asset is being used for business purposes and the potential to claim input tax credits if your business is registered for GST. Other benefits include:
If you’ve already purchased an asset, you may find some lenders are willing to buy the asset from your business, reimburse you for the cost, and then lease it back to you under a commercial hire purchase arrangement.
If you are looking to finance business vehicles, you can compare the benefits of a chattel mortgage vs lease vs hire purchase to determine the most suitable option for your business.
Fees will vary between lenders. Fees are an important part of comparing lenders and loan offers, as ongoing fees can affect the total amount you will pay over the term of the CHP. Depending on the lender you choose to apply with, you may be asked to pay:
One of the key fees when considering a CHP is an early termination fee. This may be applied by the lender should the borrower decide they no longer require the financed asset, and can incur a significant cost to the business.
Like other types of equipment finance, commercial hire purchase repayments are often flexible to suit the borrower. This may allow you to make repayments weekly, fortnightly, or monthly, and on a term between 12 and 60 months.
You may also be able to include a balloon payment — a residual amount calculated on the principal and set aside as a final, lump-sum payment — which can lower the amount you will pay in regular instalments.
An initial deposit on the asset will also reduce your regular repayment amount, which may be combined with a residual payment to further lower repayments. In the example below, we’ll look at how a deposit and residual can affect your repayments and the final payment amount.
|Deposit (20%)||Residual (20%)||Weekly Payments||Final Payment|
At the end of your term, you have a few options. You can either:
You can apply for a commercial hire purchase by contacting your bank, or by submitting a simple online application with a specialist lender.
The lender will review your application and may request additional documents to process your application further.
If the business has been operating for less than this minimum time, lenders will have difficulty in assessing your ability to repay the finance amount. If this is the case, you may be asked to include a guarantor, or provide collateral — e.g. property — as security on the loan.
Interest rates for a commercial hire purchase (CHP) will vary between lenders. To find the best rates on a hire purchase, you can take the time to independently compare offers from various lenders, or speak to a finance broker to assist in finding the lowest rate for your situation.
There are many differences between a hire purchase and lease, though the easiest way to separate the two is in what types of assets they are used to finance. For example, when choosing a business vehicle, you may wish to compare a chattel mortgage vs lease vs hire purchase first.
Commercial Hire Purchase is a type of secured business finance. The assets purchased using a CHP will be used as security on the amount borrowed. It can be used to acquire a range of business assets on a fixed-term, generally relative to the lifespan of the asset financed.
Lenders will apply interest to your CHP, and the specific rate offered will vary between lenders and borrowers. Hire purchase rates will vary depending on the lender you wish to apply with. In general, the rates for a CHP will start from around 5.00%, though you will also need to consider any fees to determine the true cost of your agreement.
Shaun is the founder of Money.com.au and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.