Whether you are buying a single car or a full fleet for your business, there’s a good chance you’ll need to finance it.
There are many different types of company car finance to choose from, each with their own pros and cons.The right choice will of course depend on your business goals and financial circumstances – we’ve created this guide to give you an unbiased overview of your options.
Famous car industry and consumer advocate John Cadogan from Auto Expert says
“When you’re buying vehicles in a business context it’s easy to focus narrowly on the tax implications of the various types of finance. And while it’s essential you make the right choices there, you need to realise there are real gains in considering on the fundamentals more broadly: Negotiating effectively the lowest price on the new vehicle(s) together with the highest prices for the vehicle(s) you are disposing of, together with the lowest cost of whatever finance scheme is appropriate to your business. There are a lot of moving parts in most vehicle upgrade transactions, and car dealers (plus other parties to these transactions) are very effective advocates for their own profit here. Your mission, somewhat in opposition, is to be a balancing influence, and become an effective advocate for your own best financial interests. You have to drive a hard bargain at every point.”
Business Car Finance Options
|Car loans||Consumer||1-7 years||Highly competitive market||Mainly for individuals (not companies)|
|Chattel Mortgage||Business||1-7 years||Possible tax deductions||Recorded on your balance sheet|
|Line of credit||Business||up to 5 years||High degree of flexibility||Requires discipline (not to spend)|
|Hire purchase||Business||1-7 years||You own the car at the end||Upfront deposit required|
|Operating lease||Business||1-7 years||Flexible car usage||You wont own at the end|
|Finance Lease||Business||1-7 years||Lease payments generally tax deductible||Responsible at the end of term for disposal|
|Novated Lease||Consumer||1-7 years||Strong Tax Incentive||Fringe benefits tax|
|Small Business Loan||Business||1 month – 2 years||Fast Access to Money||Can be expensive|
Business Car Loans and Car Dealer Finance
Applying for car finance is usually quick and easy, and in most cases can be done online.
As with any form of business loan you’ll need to provide supporting documents to evidence your business income and trading history, so the lender can see that you have the capacity to meet your loan repayments.
Where the loan will be secured on your new business vehicle the risk to the lender will be low, so the lending criteria may be more relaxed and the interest rates lower than for unsecured car finance.
Your car loan provider may offer you a choice of repayment schedules – you could make regular repayments to cover the full cost of the car, plus interest, within an agreed period.
Alternatively, you could pay a smaller amount each month, and pay the outstanding balance in a lump sum at the end of the contract. If you plan to sell the vehicle at that point you could use the proceeds to cover the cost of this ‘balloon’ payment – if not, you will have to make provision to pay for it from your working capital or arrange to refinance the residual cost.
As long as the car will be used for business purposes you should be able to claim a tax deduction for the interest you pay on your car finance.
Chattel Mortgage (or Secured Loan Agreement)
This is a form of equipment loan, which can be used for any plant or equipment, including business vehicles. It is a fixed-term loan secured on the asset you are buying – in this case, your new vehicle.
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.
However, since you’ll be using your car as security for the loan, you won’t be able to sell it before the end of the contract without permission from the lender (at which point you’ll have to repay the loan in full and may have to pay a fee for early termination).
Some lenders will allow you to schedule your repayments to suit your business cash flow, as with other forms of fixed-term business loan. This means that you could opt to repay the entire loan and interest in equal instalments over the lifetime of the loan of equal instalments – or you could 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 a higher interest bill over all.
Line of Credit (LOC)
As with a business loan, you can use it for any purpose, including to finance the purchase of your business vehicles.
If you qualify for a line of credit your lender will give you a borrowing limit, which may reduce by an agreed amount each month.
You can withdraw, repay and redraw any amount up to that limit, and you’ll only pay interest on the amount you draw down. Interest rates are generally higher than for a 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 cash flow, and choose whether to make minimum repayments or repay the loan in larger instalments. This flexibility means that if you have extra working capital available you can minimise your borrowings and reduce your interest bill.
The terms of your line of credit may vary. You could have a fixed-term LOC, which you have to repay by an agreed date, or an open-ended agreement which runs until further notice.
Be wary of using a ‘demand LOC’ (where the lender can call in the loan at any time) for a major purchase like your business vehicles, in case you get caught out without finance before you can afford to repay your loan.
Hire purchase is an arrangement where a third party – the finance company – buys your business vehicle on your behalf. They pay the full amount of the vehicle to the dealer, and then sell it on to you.
You will pay an up-front deposit at the time of purchase, and then repay your lender in instalments over an agreed period.
As with a chattel mortgage or vehicle loan, you may be able to opt to pay the full loan amount (plus interest of course) in equal instalments, or be left with a balloon payment to make at the end of the contract.
Once again, the balloon option will allow you to make lower repayments but will cost you more in interest overall.
You will also need to make provision to refinance the balance or cover the cost of the residual payment from working capital, cash reserves, or the proceeds of selling the vehicle.
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 ‘notional sale and loan transactions’ which means that you may be able to claim input GST credits and a tax deduction for depreciation of your vehicle.
At the end of the contract you will be able to use the asset as best suits the requirements of your business. Be aware, though, that if you no longer need the vehicle at that point you will be responsible for disposing of it, as title will pass to you with the final repayment.
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.
An operating lease is a form of rental agreement with a short- to medium-term life span (usually one to five 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, though, 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 aging vehicle that no longer suits your business needs.
Many operating leases will include 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 which could interfere with the way you use your business vehicles.
Generally, an operating lease usually 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 someone else.
A finance lease is similar to an operating lease – 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 will usually be able to buy the car for an agreed residual payment, unlike with an operating lease where the lender will take back the vehicle.
This can give you an opportunity to profit, if the market value of the car is higher than the residual at that point (although the opposite can also be true, of course).
Unlike with an operating lease, your business will most likely be responsible for service and maintenance of the asset, even though you do not yet own it.
A finance lease usually has fixed-rate payments, which will not increase with inflation over the term of the contract.
You can expect to pay close to the full value of the car over the course of your lease, making it an expensive option. However, you will normally be able to claim a tax deduction for your lease payments.
A novated lease is a ‘tripartite’ agreement under which you help your employees to lease a vehicle using salary sacrifice. This enables them to make substantial tax savings on the purchase price of their car and associated running costs.
This can be a valuable employee incentive, as well as reducing the burden on your business of managing operating leases on vehicles for your mobile workforce.
If you need to buy 15 or more cars for your business, you can expect to access substantial discounts and better service. Opt for a dealer with a dedicated fleet department, to avoid the time-wasting and wrangling normally associated with retail car purchases.
You may choose to fund your fleet purchase with a single business loan or a mix of operating leases, hire purchase 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 obviously 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.
Small Business Loan
A small business loan can be used for any business purpose, including buying vehicles. The main advantages of taking out an unsecured business loan are accessibility, flexibility and speed. There are a great many alternative finance providers, so the market is highly competitive. Most online lenders have a quick and simple application process and assess loan applications with great speed.
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 six months and five years – and may be able to agree a repayment schedule that matches your cash flow.
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. Be wary, too, of hidden costs and restrictive terms and conditions.
Depending on your tax position you will generally be able to 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.
Whatever choice you make, be sure to use a loan repayment calculator to work out the cost of borrowing and make sure you business can afford to be making the purchase.
How quick can I get a business car loan?
Business car finance can be arranged as fast as 24 hours, but typically over a few days. It can depend on the amount of the car and how long your business has been operating.
What car loan options are available for businesses?
For businesses, the most common type of finance is a chattel mortgage. Often you can add a balloon at the end of the finance, reducing installments throughout the term.
What is the typical interest rate for business car finance?
Current business finance interests for newer cars is around 5%. Older vehicles, trucks, trailers are generally slightly higher. Always pay attention to what fees are also applicable as these can add up quickly.
What is the difference between personal and business car finance?
Business car finance is applicable when you use the car for business purposes. A minimum of 50% of the time is required.