What is a Secured Loan Agreement
Also commonly referred to as a chattel mortgage, a secured loan agreement makes up three-quarters of all general equipment finance. Learn more about the finance option today.
When purchasing equipment, business owners have a range of payment options including using their capital expenditure budget to purchase the asset outright, drawing down on their available bank overdraft or financing the equipment either through a bank or a non-bank financier.
Each method of acquiring equipment has their pros and cons. The most cash flow friendly option, however, is Equipment Finance. And the most commonly used Equipment Finance product, according to a November asset finance report by White Clarke Group, is the Secured Loan Agreement, commonly known as a Chattel Mortgage.
With the Personal Property Securities Act 2009 (Cth) (PPSA) coming into force back in 30 January 2012, commonly used finance terminology was changed, and the “Secured Loan” Agreement superseded the “Chattel Mortgage” product, although the two products are similar in practice.
What is a secured loan agreement?
A secured loan agreement is somewhat similar to a mortgage, though for non-property assets. That is, you own the asset from the outset and your financier takes a mortgage over it. Once you have made your final repayments, the financier clears their mortgage over the asset. The asset is listed on your balance sheet from the start of the finance contract.
The monthly repayments are fixed for the term of the contract, providing predictability and control over your cash flow.
Perhaps the biggest benefit is that businesses can claim tax deductions on any interest paid, plus depreciation, if they account for their GST on a cash basis.
Is it right for you?
A Secured Loan Agreement may be preferred over a Rental Agreement where the asset has a long performance life, for example conveyor systems, scissor lifts, vehicles and trucks or heavy machinery. Once the final repayments are made, the asset is yours to use for as long as it is productive to do so.
For rapidly depreciating assets that have short life cycles, such as computers, servers, printers, photography equipment, a Rental Agreement might be the better option. Always seek independent advice from your accountant or tax advisor before making a decision on a financial product.
If you are purchasing equipment in the near future, speak to the experts at Classic Funding Group to arrange a pre-approval.
*We do not provide financial advice. You should obtain your own financial advice on the tax and accounting treatment of any finance solution you choose.