Conditional Sales Agreements and Chattel Mortgages: Buying Equipment Over Time
The common problem faced by most startups can be traced to inadequate equipment. Many hesitate to invest heavily in buying equipment for fear of running out of funds for running costs, yet the company is limited without the right equipment. The solution lies in the approach: the entrepreneur can buy on hire-purchase from the manufacturers and gradually repay over time at agreed instalments. However, an agreement must be reached, drawn and signed. Two types of arrangement are used.
Conditional sales agreement. This agreement documents the terms of an exchange in which the supplier supplies the buyer with the equipment. The supplier withholds the receipt and deed until the buyer fully completes repayment. The buyer may continue to use the equipment until the full payment is made but does not have ownership rights. If the buyer is incapable of repayment, the supplier can seize the goods and reclaim them. It is used for vehicles, work tools and equipment, and starts with a verbal agreement that is then transformed into a formal written one. The contract may include the type of property, its condition, the amount payable, the date of payment, the rate of interest, the due delivery date, the date of title transfer, and the conditions for repossession.
Its significant advantage is that it enables startups to grow better at the early stages, and it assures the supplier a way to recover if the buyer fails to pay.
Chattel mortgage contract. This is a financial agreement that enables a buyer to secure funding from a viable source, while the financial provider accepts the business or property as collateral. It is not different from a regular mortgage: if you are unable to pay, the supplier can reclaim the equipment. The key benefits are repayments in instalments spread at defined intervals over two to five years depending on the property's value, lower interest rates, flexible repayments, and an agreed balloon payment at the end of the term if a certain amount is unpaid.