Sale and leaseback of equipment is a financial option available to businesses that is something…
A question I am often asked by clients is, “what is the difference between and an Equipment Rental and a Chattel Mortgage?”.
Whilst both are finance products, their implications are different from both an ownership and tax perspective.
For some circumstances and types of equipment, a Chattel Mortgage may be the best option. In other cases, using an Equipment Rental structure may be preferable.
The key is the choice of product needs to be aligned to your circumstances.
Equipment Rental Pros
Equipment Rental Cons
Equipment Rental Tax Implications
One of the key differences between an Equipment Rental and a Chattel Mortgage is that with the Chattel Mortgage, the business owns the asset.
The Lender provides the funds to purchase the asset and takes a charge over the asset (Specific Security Agreement) as security.
The equipment being purchased will appear as an asset on the business balance sheet and the finance a liability.
Another difference between an Equipment Rental and a Chattel Mortgage is that with the Chattel Mortgage, you can include a balloon payment.
The benefit of including a balloon payment is that it can reduce your agreed repayments, as the balloon is not repaid until your last payment is due.
The downside of the Balloon is that you will pay more interest over the term of the facility.
Other differences between an Equipment Rental and a Chattel Mortgage include:
Chattel Mortgage Pros
Chattel Mortgage Cons
Chattel Mortgage Tax implications
With a Chattel Mortgage, if the asset is used for business purposes, you may be able to claim the GST included in the purchase price as an Input Tax Credit.
You may also be able to claim interest and depreciation costs, depending on how much you use the equipment or motor vehicle for business purposes
Given the differences between an Equipment Rental and a Chattel Mortgage, it is important to seek guidance before committing to one form of finance or the other.
Both are terrific products, used and structured correctly. However, they are very different, so it is important to understand their implications. Mistakes can be expensive to unwind.
Also, depending on the equipment being financed, the choice of Lender will be important. Some specialise in particular fields or simply do it better than others.
If you would like to learn more about the difference between an Equipment Rental and Chattel Mortgage, don’t hesitate to give me a call