While it would be nice if your business had a surplus of cash big enough to buy vehicles outright, the reality is that just like individuals, businesses usually need a loan to fund larger purchases like cars or trucks. The good news is that there’s a bunch of different financing options out there to get your business the vehicle(s) it needs.
Types of Business Car Finance Options
Chattel Mortgage
A chattel mortgage is probably the easiest option to understand, operating pretty much like a standard consumer car loan. The business takes out a loan, secured against the car, then repays the lender over the loan term. Ownership transfers to the business straight away, but in the event of default, the lender can repossess the vehicle. A chattel mortgage is a business loan, so the vehicle must be used for business purposes more than 50% of the time. Chattel mortgages can include a balloon payment at the end of the loan term, which reduces monthly repayments, freeing up cash flow.
The ‘chattel’ is the asset used as collateral for the loan. It doesn’t have to be a vehicle-a chattel mortgage could also be used to purchase other types of expensive machinery or equipment.
There are several tax deductions your business might be able to claim after purchasing a vehicle through a chattel mortgage:
- The GST on the purchase price
- Interest on repayments
- Depreciation
If a chattel mortgage sounds like a good way for your business to finance the vehicles it needs, check out the range of chattel mortgages on offer at carloans.com.au.
Commercial Hire Purchase
A commercial hire purchase (CHP) is different from a standard business car loan in that instead of the lender giving you the money to buy the vehicle outright, they instead buy it on your behalf. You then hire the vehicle for the duration of the loan term, until it’s paid off, at which point ownership transfers to the business. Interest repayments and depreciation can still be claimed as a tax deduction because of the intent to purchase at the end of the loan term.
Commercial hire purchases can offer more flexible repayment schedules than normal chattel mortgages. Repayments are also GST free. However, you still need to pay for servicing and any repairs on the vehicle, even though the business doesn’t own it yet.
Finance lease
If you’re looking for more flexibility, leasing could be a good way to get vehicles for as long as you need them. A finance lease is an agreement where the financer buys a car, then lends it to the business over the lease term. Once this time is up, the business can buy the vehicle outright, take out a new lease, or the financer simply takes back the car.
Leasing can prevent your business being stuck paying off an aging vehicle with declining utility. Payments are also tax deductible as a business expense.
Operating lease
An operating lease means that the vehicle is hired for a term less than its useful life. At the end of the lease term, it simply returns to the finance company, with no obligation regarding the residual payment. This can be particularly useful if your business has a high turnover of vehicles.
Expenses like repairs or servicing can also be included in the lease payments, which can help make expenses more consistent. If you take out a finance lease, you will need to make your monthly repayments, and then organise these costs separately. While the repayments on an operating lease tend to be higher, you might prefer consistent, regular payments.
Novated lease
A novated lease is a special arrangement where a company’s employee/s can lease vehicles directly, with the repayments taken from the employees pre tax salary. Salary sacrificing is a common form of renumeration across Australia, and is often hugely beneficial to the employee. From the perspective of the business, it could be a good way to reward loyal staff members, or incentivise them to work for you.
Choosing the right car loan for your business
With no shortage of choices, it might seem like a challenge to pick which financing option suits your business. Every one of these options will have a scenario where it is the obvious choice, it’s simply a matter of figuring out what exactly your priorities are. Here are a few things to consider:
- How expensive the vehicle is. If you just need a single van to make it easier to move equipment, you might decide that a chattel mortgage or other options where you take ownership of the vehicle are worth it. You might decide it’s always likely to come in handy, and even if it doesn’t it’s relatively inexpensive to pick up a cheap second hand van. On the other hand, you might need to use several large trucks which would be prohibitively expensive to buy outright, so might lean towards leasing.
- How long you will need the vehicle for. In some instances, the need for the vehicle might not be constant. For example, a more seasonal business like a landscaper might scale up operations during the warmer months, and therefore need more vans than in slower, cooler months. In these cases, an operating lease that runs for as long as the vehicle is expected to be needed for might be the most appropriate choice.
- How your business receives money. In a similar vein, if the cash flow of your business isn’t consistent, you might need to consider how often you will need to make payments towards the vehicle, and try to find financing options where you can make repayments when you have a surplus of cash.
- Tax benefits. There are various different tax deductions that apply to vehicle financing. Standard car loans allow deductions for interest payments as well as depreciation, while for a lease, all payments are classed as a business expense.
- Usage. Many work vehicles can also double up as a personal car. If you have an employee for example, that could use the company ute as their family car, you might pursue a novated lease. Other vehicles may be less practical to do this with.
Tips on getting approved for a business car loan
It’s no use figuring out which financing option best suits your business if you can’t get approved. As with any loan, a lender will want you to demonstrate that you will be able to make your repayments, and that there isn’t a high probability that you default. The following are a few ways that can help convince your lender of the trustworthiness of your business.
- Check and improve your business credit. Just like punters, the lender will want to see that your business has a history of paying debts and bills on time. It’s a good idea to monitor your business' credit score, and try to stay on top of these obligations to make sure it stays strong.
- Show the repayments are within your budget. The lender will want to build up a picture of the financial situation. Trying to borrow outside of your means can be a quick way to ensure your application is denied.
- Limit loan applications. It might seem unfair, but lenders will not look positively on prospective borrowers who have fired off applications all over town. This can indicate desperation to a lender.
- Communicate. While it’s easy to see banks and lenders as the enemy, it’s important to remember they too are a business, and you are a potential customer. They do want to get these deals over the line, so if you have clear lines of communication, and are open with your business strategy and financial projections, you are likely to find your lender will work with you to try to find a solution.
- Shop around. It’s rarely a good idea to dive straight into the first loan you can find. As well as comparing the different types of financing, you should compare products across different banks and institutions to find a good deal.
At carloans.com.au, we offer a range of some of the most competitive business car loans on the market. Get a free quote or check out the variety of products on offer.