A business car loan is a great way to finance the vehicles required for running your business. But like with personal car loans, there are loads of considerations to make when applying for this type of financing. You need to understand them to make sure that you get the right car loan for your business.
What is a business car loan?
A business car loan is a type of financing designed to meet the needs of companies in purchasing or leasing vehicles for business purposes. Most business car finance products in Australia are secured, where the vehicle acts as collateral and can be seized by the lender, should the borrower fail to pay the loan.
If you are planning to buy a new vehicle for your business, whether it’s a startup or an established company, you have the following options:
- Financing the car from a bank or any lending institution.
- Financing through the dealership
- Financing through specialist lending companies
- Working with a finance broker
Banks generally offer good interest rates, but they have longer loan application processes compared to other lenders. Applying through a finance broker is the most convenient of all because everything will be taken care of by the broker or financial institute agent.
Different banks and lenders have varying business car loan applications. Although, most of them require the car/s to be used for business purposes more than 50% of the time. All types of businesses can use this car financing to purchase any model or make of vehicles required for business operations.
Some banks and lenders also offer a loan pre-approval that you can use when shopping for your business car. Others offer additional warranties, free one-year insurance, and other freebies that are included in your package.
Different loan options
A Business Car Loan can be classified further into five different types. Each has its own advantages and disadvantages. Some are better for purchasing a single business car, while others are more suited for buying an entire fleet.
1. Car Loan
Usually with a term between two to five years, this first type of business car financing is a secured loan and can be sourced from banks, lenders, and dealerships. A car loan application is usually fast, easy, and can be done online. The lender will give you options for repayment schedules where you can choose from to suit your business needs. That includes whether or not to include a balloon payment.
To find out more, check out our helpful article on What Are Balloon Payments.
In this type of car loan, you’ll have full ownership of the vehicle right away even though the payment is not yet completed. You have an option to sell the vehicle to cover the balloon payment at the end of the term. Also, you’ll be able to claim tax deductions for the interest payments, as long as the vehicle is used for business purposes for more than half of the time.
2. Hire purchase
In this type of business car loan, the finance company will purchase the vehicle on your behalf in full, then resell it to you. You’ll have to make an upfront deposit and do monthly installments for the agreed number of years (usually 1 to 7). The ownership of the car will be transferred to you when the payment is completed.
You have an option to make a balloon payment at the agreed term to lower the monthly repayments. You also have an option to choose the contract term and installment schedule to fit your business needs.
3. Chattel mortgage
A chattel mortgage is a loan that can be used for purchasing any type of equipment for business purposes. In this case, the car or fleet of vehicle that your company requires. This type of business car loan will allow you to own the vehicle outright. However, since a chattel mortgage is secured, you won’t be able to sell the car until the loan term is done. But since the loan is secured, you’ll have a better chance of getting lower interest rates from the lender.
4. Finance lease
A finance lease is an agreement between the lender and the borrower wherein the former buys the vehicle and the latter has the privilege to lease it. The ownership remains with the lender until the contract’s end when the borrower can purchase the vehicle for a residual payment.
The downside of this type of business car loan is the cost of servicing and maintenance, which will be taken care of by the borrower despite not having ownership of the vehicle yet. On the other hand, lease payments are tax-deductible, which can save you some money.
5. Operating lease
An operating lease works the same as a finance lease, except at the end of the contract term, you don’t have an option to buy the vehicle and the maintenance cost will be included in your monthly repayments. What you’ll have is a choice to change the vehicle you are renting and upgrade for a better one that suits your business needs. You can do so regularly to avoid operating an aging car.
5. Novated Lease
A novated lease is a type of business car loan wherein you lease a vehicle on behalf of your employee, then the lease cost will be deducted from the employee’s pre-tax income. This will enable your employees to save money tax liabilities and the running costs of the vehicle. However, the workers will still pay Fringe Tax Benefits, which your business has to manage on top of the lease administration.
Lear more about Fringe Tax Benefits on a Novated Car Lease.
How to decide?
Deciding which type of business car loan to get should depend on your business needs. What is the purpose of the vehicle? Do you need to retain its ownership? Can you afford to purchase or lease the car? These are just some of the questions you have to answer.
You also need to take into consideration the cost of the vehicle, balloon payment, interest rates, and monthly repayments when deciding which business car loan to get. All of these will affect your long-term business finances.
By getting a business car loan, you’ll be able to avail the Instant Asset Write-off by Australian Federal Government. This applies to businesses with a profit of $10 million to less than $50 million and applies to new or used cars less than $30,000. You may claim tax deductions for every business car you’ll purchase.
Aside from this, you’ll be eligible to claim tax credits on GST, depreciation cost, input tax, interest cost or lease cost. It all depends on which type of business car loan you take.
Aussie Car Loans
Business Car Loans are very useful financing tools for your business, whether you have a small, medium or large-scale company. Just make sure to consider your business need, the type of business car loan that fits it, and the bank or lender to source the loan.
For businesses near Melbourne, Brisbane, and Sydney; Aussie Car Loans can help with your car purchases. We can offer a commercial car finance solution that suits the needs of your business.
We have a chattel mortgage, standard lease, novated lease, and hire purchase options for new and used vehicles. We also have finance specialists who can help you decide the best type of business car loan for your business.