What is a Commercial Hire Purchase?
A Commercial Hire Purchase is a type of secured business finance 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.
In this guide, you will learn:
- How a commercial hire purchase works
- Who uses them
- What you can finance
- How to qualify and apply
- How repayments work
- Fees, terms, and rates
- GST benefits
How does a Commercial Hire Purchase work?
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:
- Uses the financed asset as security on the borrowed amount
- Allows a business to pay for an asset over a fixed term instead of upfront
- Does not offer ownership of the asset until the end of the term
- May include a residual payment
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.
With a CHP, a business will:
- Choose an asset
- Submit an application to a lender and provide details of the asset
- Provide any additional documents required by the lender to approve the application
- Agree to lender repayments and terms when finalising the agreement
- Arrange to collect the asset from the supplier
- Make regular repayments to the lender
- Take full ownership of the asset once repayments are complete
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).
Who would use a CHP?
Businesses, sole traders and self-employed individuals can all make use of a 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.
What can you finance?
- Vehicles - Cars, utes and vans
- Heavy vehicles - Trucks, trailers and buses
- Agricultural equipment - Tractors, trowels, cultivators
- Construction and access equipment - Excavators, loaders, forklifts, scissor lifts
- Other equipment - Computers, business fit-outs, and manufacturing equipment
Who offers them?
Most banks will offer a commercial hire purchase as part of their equipment finance products. While banks generally offer the lowest rates on a CHP, the application and approval process is often quite slow. You can also apply with alternative lenders, including:
- Non-Bank Lenders
- Specialist Asset Finance Lenders
These lenders will allow you to apply for a CHP online, with many offering same-day approval on applications at the cost of higher interest rates.
How to qualify
You qualify if your business:
- Has a valid Australian Business Number (ABN)
- Is registered for Goods and Services Tax (GST)
- Intends to use the asset predominantly for business purposes.
You will need to meet basic qualifying criteria similar to most business loans, such as:
- At least 18 years old
- An Australian resident
- Minimum trading history (time will vary between lenders)
- No current or previous bankruptcies or Part IX debt agreements
If you cannot provide the minimum documentation required for a commercial hire purchase, you may wish to consider a low-doc business loan as an alternative.
How to apply
You can apply for a commercial hire purchase by contacting your bank, or by submitting a simple online application with a specialist lender. If you choose to apply online, you will need to provide some basic details, which may include:
- Details about the asset you wish to finance - e.g. the type of asset and its age
- The finance amount you are seeking
- Your contact details
- Business details - e.g. time in operation and monthly or annual turnover
The lender will review your application and may request additional documents to process your application further. You may only be asked to provide your ABN, GST registration details, and business bank statements if you are:
- Buying a vehicle to the value of $150,000 and have been in business 12 months
- Buying any non-vehicle goods and assets up to a total value of $100,000 and have been in business 24 months
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.
How do repayments work?
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.
You can use the equipment finance calculator to quickly estimate repayments on a CHP and compare offers.
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.
In all examples below:
- The finance amount is $50,000
- The term is 3 years
- The interest rate is fixed at 6.00%
- Repayments are made weekly
- Deposits are 20% of the principal amount
- Residuals are 20% of the principal (minus any deposits)
|Deposit (20%)||Residual (20%)||Weekly Payments||Final Payment|
NOTE: This calculation is presented as an example of how deposits and residual amounts affect regular and final repayments. The figures used may not accurately reflect current commercial hire purchase rates and repayment terms.
At the end of your term, you have a few options. You can either:
- Make the final payment and own the asset - if there is no residual amount
- Pay the residual amount and own the asset
- Refinance the residual amount into a new CHP
If you choose to refinance the residual amount on a commercial hire purchase, you may be offered much lower refinance rates due to the decreased value of the asset.
What is the term?
The terms for a commercial hire purchase are generally flexible to suit the borrower. The majority of lenders will offer fixed-term hire purchase contracts between 12 and 60 months. In most cases, the length of the term will be relative to the lifespan of the asset you wish to finance.
Commercial Hire Purchase Terms
|Minimum Term||Maximum Term|
|1 year||5 years|
What are the rates?
Hire purchase rates will vary depending on the lender you wish to apply with. In general, the rates for a CHP are similar to other types of Equipment Finance Interest Rates and will start from around 4.49%.
What are the fees?
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:
- An upfront deposit
- An establishment fee
- Monthly maintenance fees
- Late payment fees
- Early repayment fees
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.
What are the benefits?
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:
- Preserving working capital
- The asset is used as security - i.e. a CHP doesn’t require property as collateral
- Fixed rates and repayment amounts
- Flexible repayment terms to suit business cash flow
- A residual can be used to reduce the repayment amount
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.
Businesses can use a CHP to finance 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.
In summary, when using a CHP:
- You will own the asset at the end of the term
- A residual payment can be used to reduce repayment amounts
- A deposit can be used to reduce the total interest paid
- GST is not charged on regular repayments or residual payment
- he lender can reclaim the asset if you don’t meet your payment obligations
Commercial Hire Purchase (CHP) Pros and Cons
| || |
Commercial Hire Purchase FAQ
What are the interest rates for a hire purchase?
Interest rates for a commercial hire purchase (CHP) will vary between lenders. To find the best rates on a hire purchase, you should compare lenders and finance options. You can quickly see current interest rates for a hire purchase here.
What is the difference between hire purchase and lease?
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.
What is hire purchase in finance?
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.
Is there interest on a hire purchase?
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.