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What Are The Financial Benefits Of Commercial Hire Purchase?

If you are a small business owner, shelling out vast amounts of cash without impacting your cash flow is often a significant challenge. Purchasing any equipment outright is not possible as you don’t have access to the required funds at all times. And yet, gaining ownership over your business assets is always an attractive option.  So, how can you achieve that? Your answer lies in commercial hire purchase – also abbreviated as CHP.

Now, what is commercial hire purchase?

delailed-concept-of-hire-purchase

In a CHP agreement, your lender buys the car on your behalf and lends it to you for an agreed period with fixed monthly installments. Usually, the interest rate remains constant during the entire tenure. You are however responsible for any expenses associated with the vehicle such as registration, insurance, and maintenance costs.

Who can opt for CHP?

Hire purchase is suitable for commercial purposes, especially startups and small businesses that wish to own the asset in the long run but don’t have the finances to purchase it outright. Companies can use it, so the sole traders, trusts, Australian Business Number (ABN) holders, and people who are eligible for a vehicle allowance.

 

Difference between hire purchase, lease, and loan

lease-financingvshirepuchase

 

Before progressing to explore hire purchase in detail, I would like to address another confusion that my clients usually face while scouring through so many hifalutin financial terms. One question normally asked is – what’s the difference between hire purchase, lease, and loan? Aren’t they essentially the same?

 Well, No. In a lease, ownership of the asset lies with the lessor. You can use the equipment, but you can’t buy it at the end of the lease term. In CHP, the vehicle is yours as soon as you pay off the last installment.

 Again, in a car loan, you get money from the bank that you use to buy the car. You gain ownership immediately. Obviously, you have to repay the loan amount and interest. In hire purchase, the car is not yours until you settle the final payment. Post this; the ownership will automatically be transferred to you.

 You should decide after carefully considering the facts and fully understanding the terms. Let’s come back to CHP.

Why should you opt for this financing option?

  1. Tax benefits

 

tax implications

 

Let me begin with the tax implications in a commercial hire purchase – also termed as an offer to hire. When your lender purchases the vehicle on your behalf, he pays the full price – inclusive of GST. Therefore, any fee attached to it qualifies for ‘taxable supply’. Thus, if you account for GST on cash or accrual basis, this option is viable for you as you can claim the loan as a part of your cash deductions in the next Business Activity Statement (BAS).

According to Australian Taxation Office, this is how you can claim GST credits on hire purchase:

When you account for GST on the non-cash basis:

account for GST on the non-cash basis  

When you account for GST on cash basis:

account for GST on cash basis

However, no GST is charged on your repayment amount or balloon payment. Apart from this,

you are eligible to claim tax deductions on the depreciation and interest as well, depending on the amount of business usage of the vehicle.

  1. Additional financial benefits

Apart from tax benefits, CHP offers several other financial advantages to the hirer.

financial advantages to the hirer

  • All financial commitments for hire purchase are entered as capital expenditures on your balance sheet.
  • You need not give any deposit upfront. I mean, there’s no stringent requirement as such. But, if you must, you may still contribute to reduce the amount financed. This is quite advantageous for an organization which requires expensive equipment and doesn’t possess enough funds. It helps in minimizing debt burden, thereby offering better return on assets (ROA) ratios.
  • CHP plans sometimes include maintenance costs in the agreement. Therefore, as an owner, you need not worry about having to spend on expensive repair costs.
  • The asset serves as sufficient security for the financier.
  • You have an added advantage of tailoring your instalments to suit your cash flow. For example, put a balloon payment at the end to reduce your repayments. However, factors such as age and type of vehicle will affect what residual amounts you can have.
  • CHP comes at a fixed interest rate for the entire term of the loan; which means your instalments are not variable.
  • You can even settle the loan fully anytime if it suits your requirements.
  • You are offered flexible terms – ranging from one to five years.
  • The minimum financial amount is $10,000.
  • You can opt for your own repayment frequency to suit your business – monthly, quarterly, semi-annually, or annually.
  • There are various payment options available such as D-debit, BPAY,and coupon books.
  • Since you have an even distribution of fixed instalments, you can put your cash reserves to more efficient use in the business. This also allows for organised future planning and accurate budget forecasting.
  • You get automatic ownership of the vehicle at the end of the agreement.
  • The minimum financial amount is $10,000.
  • You can opt for your own repayment frequency to suit your business – monthly, quarterly, semi-annually, or annually.
  • There are various payment options available such as D-debit, BPAY, and coupon books.
  • Since you have an even distribution of fixed instalments, you can put your cash reserves to more efficient use in the business. This also allows for organized future planning and accurate budget forecasting.
  • You get automatic ownership of the vehicle at the end of the agreement.

 Conclusion

 In a nutshell, when you consider a commercial hire purchase, you might need to investigate its various financial benefits and how they can meet your business needs. Especially, analyze multiple tax benefits that you may be eligible at the end of the financial year. Depending on your cash flow and budget, you need to dig a bit deeper into the financial realm and its jargons before arriving at a decision.

 To secure your business, arriving at the right vehicle financing option is essential. I hope my suggestions here will help you in taking a step in the right direction.

 Disclaimer:

 Whenever in doubt, please always seek tax advice from your accountant before entering any financial product.

 

 

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