Corporations, partnerships, and limited liability companies are types of businesses that may have the need to buy a company car. There are many things to consider before financing a car for business. Some things include the type of business, how the organization is structured, and the tax implications that such a decision will have on the company’s financial statement. When these and other factors have been considered, two popular financing options are the hire purchase and the chattel mortgage.
A hire purchase agreement, also known as a commercial hire purchase, means that the finance company is the one that purchases the car, and the business would hire it from them for the contractually stated payment plan. This option is very similar to a lease, in that, once the final payment has been made of the outstanding balance the car belongs to the company.
What are some reasons why a business should use a hire purchase agreement to finance their car? One good reason is that the structure of the agreement is a secured loan. The finance company will use the car being purchased as security for the agreement. Since the loan is secured by the car, the interest rate will be lower. This also has the added benefit of establishing a lower payment that will not fluctuate. This will enable the business to budget appropriately and have peace of mind knowing that the payment will not increase.
Another advantage to consider when entering into a hire purchase is that the length of the agreement can vary depending on the needs of the company. Each deal can be structured to meet the needs of the company, rather than to be pigeon-holed into one deal. And of course, after the final payment has been applied the car belongs to the company and they can do with it whatever they want.
However, there are some disadvantages of a hire purchase that should be considered before making the decision to finance the vehicle. One such disadvantage is taking into account the depreciation of the vehicle over the agreement’s span. This could be important if the car will be sold after the agreement has been completed. Another thing that could be considered a disadvantage is the lack of choice that is provided in the type of car that can be financed with a hire purchase agreement.
In order to be eligible for a hire purchase agreement the car’s primary use must be income producing. That may sound worse than it is because all it means is that the car must be used for business. A hire purchase option can be a great way to finance a car, but the company’s needs and wants will determine if it is the right way to go about it.
Another popular financing option when it comes to purchasing a car is by using a chattel mortgage. Chattel is an object that is capable of being moved. It is an old English word and helped to distinguish from objects that could not be moved, like land. In a chattel mortgage, the chattel serves as the security for the loan. To qualify for this type of financing, the car must be used at least 50% of the time for business.
There are many reasons why a company would want to use a chattel mortgage to finance their car. Financing a car by using a chattel mortgage will enable the business to take immediate ownership of the car because it is classified as a cash sale. Since payments can be deferred to a future date the company does not have to make a capital outlay, which helps with protecting the cash-flow. The interest charged can be tax-deductible, and the company can use the depreciation as another tax deduction.
A chattel mortgage also allows for a flexible payment plan making future budgeting easier. Another reason to use this type of financing is that the types of vehicles that can be financed can range from new, used and even privately owned. It also comes with the option to include a balloon payment at the end of the term. Of course, the balloon payment does not have to be included in the final payment. It all depends on what the company’s needs are at the time of financing. After the last payment of the chattel mortgage has been applied, the ownership of the car is transferred to the company.
Does it make sense to use a chattel mortgage to finance the car for business? That is something that only the business can decide for sure. One potential negative of using a chattel mortgage to finance the acquisition is that the loan will be reported as a debt on the company’s balance sheet. All factors should be weighed before entering into any type of financing program.
Of course these are only two car financing options available to a business and other options do exist, but the hire purchase and the chattel mortgage are two common ways to finance a car. While they both come with their own strengths and weaknesses, it is up to each business to decide what works best for their company.
