Whether you’re buying a car for your business or a fleet of vehicles, there’s a good chance you’ll need finance. The best way to finance a car for your business depends on your preference of contract type, which tax benefits are available to you, and your goals. We cover everything you need to know below.
Key points about business car finance
- There are two main options for financing a car for your business: a loan or a lease
- Business car finance interest rates range from 5-20% p.a.
- A chattel mortgage is the most common type of business car finance
- Interest costs and fees on business car finance and depreciation may be tax deductible
Compare business car finance rates
| Car finance type | Interest rate range | Term |
|---|---|---|
| Business car loan | 5-20% p.a. | 1-5 years |
| Chattel mortgage | 5-10% p.a. | 1-5 years |
| Line of credit | 10-15% p.a. | 3-30 months or ongoing |
| Hire purchase | 7-15% p.a. | 1-5 years |
| Operating lease | 5-15% p.a. | 1-3 years |
| Finance lease | 6-15% p.a. | 1-5 years |
| Novated lease | 7-10% p.a. | 1-5 years |
| Fleet purchasing | 10-15% p.a. | Flexible |
| Small business loan (unsecured) | 15-20% p.a. | 1-3 years |
Car finance options for your business explained
1. Business car loan
A business car loan provides you with a lump sum payment to buy a vehicle for business use. This can include company cars, utes, vans and trucks. The vehicle financed is used as collateral for the loan.
You’ll have two repayment options:
1. Repay the loan principal (what you borrow) and interest in regular instalments over a set period (the term)
2. Pay a smaller amount each month and the outstanding balance in a lump sum at the end of the contract (called a balloon payment).
If you plan to sell the vehicle at that point, you could use the proceeds to cover the cost of the balloon payment and if not, you’ll have to make a provision to pay for it from your working capital or arrange to refinance the residual cost.
Provided the car is used for business purposes, you should be able to claim a tax deduction for the interest you pay on your car finance and depreciation.
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2. Chattel mortgage
A chattel mortgage is a type of equipment loan that can be used for any plant or equipment, including business vehicles. It’s a fixed-term loan secured against the asset you’re buying — in this case, a new vehicle.
Some lenders will allow you to schedule your repayments to suit your business cashflow, as with other forms of fixed-term business finance.
This means you could:
1. Opt to repay the entire loan and interest in equal instalments over the lifetime of the loan
2. Pay lower instalments and repay the balance at the end of the finance term with a lump sum balloon payment.
Be aware that making lower repayments will result in paying more interest overall.
As with a standard car loan or dealer finance, this form of funding allows you to buy your car outright so that you'll have full ownership from the outset and will be free to dispose of it or continue using it in your business after the finance contract ends.
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3. Line of credit
A line of credit (LOC) is a flexible, revolving facility much like an overdraft or credit card. You can use it for any genuine business purpose, including to finance the purchase of new or used vehicles.
You can withdraw, repay and redraw any amount up to your credit limit, and you’ll only pay interest on the funds you draw (not the entire credit facility). Interest rates are generally higher than for a small business loan, and you can expect to pay set-up and ongoing administration fees (and maybe transaction fees too).
You can generally vary the repayments on your LOC to match your cashflow, either by making minimum repayments each month or by repaying the loan in larger instalments. This flexibility means that if extra working capital is available, you can minimise your debt and interest payable.
The terms of your line of credit may vary. You could have a fixed-term LOC, which you must repay by an agreed date or an open-ended agreement that runs until further notice.
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4. Hire purchase
A hire purchase is a finance agreement where a lender (lessor) buys the business vehicle on your behalf and leases it to you in return for regular repayments. You’ll generally have to pay a small upfront deposit at the time of purchase, and then repay your lender in instalments over an agreed period. You have the option to purchase the asset outright at the end of the agreement.
As with a chattel mortgage or business car loan, you can opt to pay the full loan amount (plus interest) in equal instalments or be left with a balloon payment to make at the end of the contract.
You will have to cover the cost of the residual payment from working capital, cash reserves, or the proceeds of selling the vehicle or make a provision to refinance the balance.
With a hire purchase agreement, you will not own the car until the end of the agreement. However, the ATO treats hire purchase agreements as a standalone sale or purchase in a tax period which means you may be able to claim input GST credits and a tax deduction for depreciation of your vehicle.
As with business loan and car finance options, you may be able to negotiate a contract term and repayment schedule to suit your business needs and trading patterns.
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5. Operating lease
An operating lease is a rental agreement with a short-to-medium-term lifespan (usually 1-5 years). Leasing tends to be more expensive than most other forms of vehicle finance but offers the crucial advantage of flexibility.
As with a hire purchase agreement, the finance company will purchase the vehicle on your behalf and then rent it to you.
The key difference is that you will not own the car at the end of the lease and will generally have the option to upgrade regularly rather than being stuck at the end of the contract with an ageing vehicle that no longer suits your business needs.
Most operating lease agreements include a provision for maintenance. The cost of this service will be built into your lease payments, which can substantially increase the cost of your finance — but allows you to avoid the risk of unexpected maintenance costs if something goes wrong with your vehicle.
Pay close attention to the terms of your lease, as the lender may impose mileage restrictions or other restrictive terms that could interfere with how you use your business vehicles.
Generally, an operating lease only covers part of an asset's useful life. When the contract ends, the lender will take possession of the vehicle and sell it or lease it to another business.
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6. Finance lease
A finance lease is similar to an operating lease, whereby the finance company will buy the vehicle on your behalf and lease it to you in exchange for regular repayments.
However, at the end of the finance lease, you can usually buy the car for an agreed residual payment, unlike with an operating lease where the lender will take back the vehicle.
A finance lease usually has fixed-rate payments, which will not increase with inflation over the contract term.
You can expect to pay close to the car's full value over the course of your lease, making it an expensive option. However, you can normally claim a tax deduction for your lease payments.
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7. Novated lease
A novated lease is a ‘tripartite’ finance arrangement used with salary packaging. This helps business employees buy a vehicle through their pre-tax salary. Employees can make substantial tax savings on the purchase price of their car and associated running costs.
This can be a valuable employee incentive and reduce the burden on your business of managing operating leases on vehicles for your mobile workforce.
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8. Fleet purchasing
You can consider a fleet vehicle buying or leasing agreement if you need to buy multiple cars for your business. Both usually offer substantial discounts. Go for a dealer with a dedicated fleet department to save on time and paperwork.
You may choose to fund your fleet purchase with a single business loan or a mix of operating leases, hire purchases and chattel mortgages. There are specialist fleet management companies in Australia who will work with you to select finance, purchase and maintain your fleet vehicles.
While you'll pay for this service, you may make valuable savings in administration time and fleet companies often have the buying power to negotiate discounts for you on purchase price, fuel or servicing.
9. Unsecured business loan
An unsecured business loan can be used for any business purpose, including buying vehicles. The main advantage of taking out an unsecured business loan is that you don’t have to provide collateral for the finance, which makes the process quick and easy, although your interest will be higher.
Taking out a loan to finance your business car means you’ll own the vehicle outright and be able to dispose of it as you wish at any time. You can generally choose the term of your loan (usually between 1-5 years) and may be able to agree on a repayment schedule that matches your cashflow.
Business loans are often more economical than other forms of car finance, although rates and supplementary charges do vary widely and it’s important to compare the full cost of the loan, not just the advertised interest rate.
Depending on your tax position, you can generally claim the interest you pay on your business loan as a tax deduction. You will have to record your loan on your balance sheet, which could impact your ability to borrow for other purposes. In addition, alternative lenders may still be able to help if you have bad credit.
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FAQs about business car finance
What’s the typical interest rate for business car finance?
Business car finance interest rates range from 5-20% p.a., depending on whether the car is brand new or used, the contract term and whether there’s an ownership option at the end of the term. Always pay attention to what fees are also applicable, as these can add up quickly.
What’s the most popular car loan option for businesses?
For businesses, the most common type of finance is a chattel mortgage. You can opt for a balloon payment at the end of the finance to reduce instalments throughout the term. The median loan amount for a chattel mortgage is $50,000, according to Lend proprietary data.
How quickly can I get a business car loan?
You can usually get approved for business car finance within a few days and in some cases within 24 hours. It will depend on the type of vehicle you want to finance and your specific finance agreement.
What’s the difference between personal and business car finance?
Business car finance is designed to buy vehicles used primarily for business purposes (at least half the time). You can’t use business car finance to buy a personal vehicle and vice versa.
1. Proprietary data of small businesses who applied for a chattel mortgage through Lend.com.au and have been operating for at least five years (2023).
