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Common Business Car Finance Options Explained

This Rapid Solutions customer bought their vehicle after researching business finance options.

As a pest controller or building inspector, you might need to buy a vehicle to increase productivity and help your business grow. Or, you might be just starting out and need to kit out a vehicle for yourself. There are several business car finance options which you can choose from, each with benefits and drawbacks.

The main benefit of a business car loan or lease is that you can get a new business vehicle and begin using it straight away. Even if you don’t have the capital to buy it yourself. And in the process, you can hopefully grow the value of your business as you pay back your loan and interest.

As a service provider, you’re constantly making decisions in the day to day running of your business. You weigh up the pros and cons of each choice and carefully decide what’s best for your business.

Choosing a business car finance option is the same. You weigh up the benefits and drawbacks. Then you use the information you gather and your business smarts to make the best choice.

Types of business car finance options

No business car finance option suits every business. You need to look at your cashflow, your projections and your vehicle needs and read the fine print before signing  a loan or lease contract.

The most common business car finance options follow. Each has its pros and cons, from tax benefits to how much interest you’ll need to pay:

  1. Chattel mortgage
  2. Line of credit
  3. Hire purchase
  4. Finance lease

We’ll explore these in detail soon.

Before you do anything though, make sure you’re 100% up to date with the government’s current instant asset write-off for eligible businesses.

How does business car finance work?

A business car loan or lease allows you to get your vehicle sooner so you can use it to make business life easier and/or grow your business and improve your revenue.

You’ll need to repay your borrowings in instalments, including interest, which means the car will cost more than buying it upfront. For many, the extra cost is worth it, because in the long run, you’re buying the opportunity to earn more.  

Important considerations are assessing your budget to understand how much your business can afford to pay and then deciding which business car finance option best suits. Remember that if you commit to repaying an unrealistic amount you risk losing the payments you’ve made – as well as the car.

Important business vehicle finance considerations

You also need to lock in your strategy from the start. Do you want to repay your debt as soon as possible or are you happy to enjoy the tax benefits for longer, knowing you’ll pay more over a longer term?

At the crux of business car finance options is this: you’re borrowing money to either buy or lease the asset. You only truly own it outright once you’ve repaid the debt plus any interest or other fees involved, even though with some finance options the car is seen to be ‘on the books’ of your business.

However, that’s no reason to avoid finance and use cold, hard cash instead. Three key elements of business car finance are very attractive to many business owners because they reduce how much tax you pay. These are – depending on the financing option you choose:

  • Business owners registered for GST may be able to claim the GST in the car’s price and fees
  • In the same vein, you can likely claim tax on the interest charged on the amount you owe
  • The same goes for claiming for depreciation on the vehicle

How to finance a vehicle for business

When it comes to business car finance options, you could take out a loan from a bank or other lending institution. Another possibility is dealership financing, in which case you enter into a direct agreement with the dealer you’re buying the business vehicle from. Let’s look at each type of business car finance option… but first, for a quick guide to choosing a vehicle, watch this video:

1. Chattel mortgage

A chattel mortgage is a popular type of business loan which can be used to buy movable equipment, such as a car. It’s similar in structure to a fixed rate home loan. However, with this finance option the car must be used for business more than half the time.

At its essence it’s a fixed term loan, where at the start you and the lender agree on a fixed period (e.g., 5 years) to repay the full amount. The interest rate applied is determined at the start of your agreement and will remain the same throughout.

Importantly, the lender uses the car as the security for the loan. This is why if you no longer need it before the end of your repayment period, you must get permission from the lender before you can resell it. At which time you’ll still need to repay the full debt plus the interest as well as termination fees.

Or, you may decide to pay off the chattel mortgage in its entirety and take complete ownership of the vehicle. Read more on how to finance a business vehicle with a chattel mortgage.

2. Line of credit

As a business owner, you may be familiar with the payment terms on a credit card. A business line of credit (LOC) loan is similar in that you have access to an agreed dollar amount. You can use it for any business expense once approved, including a vehicle.

A LOC can either be fixed term or open ended. With fixed term, much like a chattel mortgage, your contract has a set end date. Whereas open ended runs until much further.

This loan is different to a traditional fixed interest loan because you only pay interest on the amount of debt you’ve drawn down in each monthly period.

This means that if your business has taken in fewer dollars in July, you may withdraw the full amount to pay your monthly instalment on your car debt. Then if business booms in August, you may use your business’s cashflow to pay the instalment instead – and put some back on your LOC, if you like, which means you save on paying interest that month.

The smaller your debt becomes, the less you will end up paying towards interest.

One thing to be careful of – you may end up withdrawing the full amount when you don’t need to, simply because you have access to it. This can get you caught in a cycle of debt.

3. Hire purchase

With hire purchase, the financier will buy the car on your behalf and you hire it from them over a set period of time, making repayments in instalments after first contributing a down payment. You can usually negotiate with the lender around how long the contract should run for and what your lease payments will be.

One key thing to remember is that – unlike with the other finance options in this article aside from a finance lease – you’ll only be the vehicle owner after you’ve made all the payments. It won’t be ‘on your books’ before that, it’s recorded as a lease from the lender.

However, you’ll still be able to claim tax on interest and depreciation. That’s because your hire purchase contract is still technically seen as a stand-alone sale within the contract’s tax period.

At the end of the contract term when all car payments have been made, including interest charges, you can take ownership of the vehicle.

4. Finance lease

Just like with hire purchase, a lender has ownership of the vehicle and you pay them to use it. You repay a fixed rate monthly instalment that’s determined at the start of your contract.

At the end of your contract, you don’t automatically take ownership of the car, but you have the choice to buy for a prearranged lump sum.

It’s less of a commitment than an outright purchase with a loan against it or a hire purchase, and you can choose to upgrade the vehicle after your lease term is over. However, you can’t claim depreciation over the lease period or apply for the instant asset write-off scheme. This is one big difference to a hire purchase.

Speak to your accountant or financial advisor about which business car finance option to choose.

Other considerations

With any finance option, you’ll need to research different providers to carefully compare costs and terms before settling on one. These can vary drastically from one company to another, and the small print needs to be examined carefully.

Be sure you fully understand all your responsibilities and your rights before signing the agreement.

Savvy business car finance decisions

Regardless of which finance option you decide to take on, you should also know exactly what type of vehicle you need and negotiate the costs along the way before buying. It’s always a valuable exercise to negotiate! You never know how much money you may be able to save, just by asking the question.

Make sure to get your quote in writing and understand what all the costs and terms are first – including ‘hidden’ costs and admin fees.

Also, read up on claiming car expenses for business to understand where you can benefit. On this note, you should always speak to your accountant or, if you do your own accounting, consider talking to a financial advisor.

Show them the contract paperwork and discuss in detail your business’s financial position and the loan/lease responsibilities before your sign. A financial advisor can tell you about risks involved which may not otherwise be obvious. They could save you a whole lot of time and money.
Buying a new vehicle and choosing the best business car finance option can be stressful, but also rewarding. When you buy a new car for business, you‘ll very likely enjoy greater potential for increasing your profit. You’re buying it for that reason, right? If not, perhaps you should rethink…

Business vehicle insurance

Did you know that Rapid Brokers offers business vehicle insurance specifically tailored for pest controller and building inspector vehicles? Find out about the comprehensive car insurance we can source for you. That way if your business vehicle is stolen or damaged in transit, you can cover much of the bills to repair or replace it.

Business car finance options – over to you

Share your experience of how difficult or easy it was to finance your business vehicle in the comments below.

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