Commercial Hire Purchase
A CHP (also commonly known as an asset purchase) contract is an agreement with fixed payments over the term. However, ownership is ‘implied’ at the outset. The hirer claims interest and depreciation against income during the term of the agreement.
The goods are purchased by the lender at the direction of the borrower and ownership remains with the lender until the final payment is made, at which time the title passes to the borrower. Security for the loan is the goods themselves.
CHP is similar to leasing except that the client claims the allowable depreciation on the equipment plus interest as a tax deduction, as opposed to claiming the actual lease payments as with a finance lease.
Payments can be structured so that nothing is owed at the end of the term or a small balloon payment (like a residual in a finance lease) can be used to offset and reduce monthly payments.
Interest is charged at a fixed rate for the term of the loan and calculated on the initial amount advanced with regular payments over the loan term covering both principal and interest. Up to 100% of the cost of the goods can be financed.
The borrower is responsible for insuring the goods, maintaining them in good working order and meeting the regular schedule of payments. Both the asset purchased and the repayments used to purchase it should appear on the borrower’s balance sheet.
Hire purchase agreements may be paid out early or renegotiated. However, the rebate may not be as equitable as that which is usually available using a banking loan facility due to the higher risk being taken by the lender in providing the facility.
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Leasing Finance VS Commercial Hire Purchase
Business enterprises ranging from one-man sole traders right through to large international corporations may seek funding facilities that will enable them to save money on the capital outlay necessary to purchase an asset while enjoying the income produced by it, or simply just being able to use it. This can be achieved through using either leasing or CHP.
Business enterprises will more than likely consider using both types. The choice between the two will depend on which option gives them the most convenience and flexibility as well as the opportunity to maximise their tax deductions.
Both leasing and CHP can be structured to meet your business’s special needs. To decide which is the best option, you must first understand those needs and determine.
Ask yourself these questions
- How does the equipment make the business more competitive?
- What is the most efficient use of the business’s cash flow to pay for this equipment?
- How long will the business use it?
- What will the business’s equipment needs be in the future?
The choice of either leasing or CHP may simply boil down to the tax treatment of the asset, including GST, and whether the business wishes to bring it onto its balance sheet.