Business car loans

What are my business vehicle finance options?

There are a number of ways to finance a business vehicle and each offers particular benefits around things like cash flow, tax incentives and flexibility.

Here's a summary of the most popular business car loan options:

• Finance lease. This option allows your business to enjoy the use of a commercial vehicle and all the benefits of ownership, while the lender retains vehicle ownership. The lender purchases the vehicle on your behalf and then leases it back to you. You will have to make monthly lease payments until the term of the lease is up. After your lease expires, you could pay off the remaining value on the lease and take full ownership of the car, trade it, or refinance the lease.
• Commercial hire purchase. This business car loan lets you hire a car from a lender for an agreed period. You then make fixed monthly repayments over this period and take ownership of the vehicle at the end of the loan term, provided you have paid off the loan.
• Chattel mortgage. A chattel mortgage involves a lender lending you money to purchase a vehicle. You take immediate ownership of the vehicle, but the lender gets to use your vehicle as collateral or security. Once the contract is over, the lender will remove the mortgage.
• Novated lease. This is a vehicle finance option that allows employees to lease a vehicle using their pre-tax income. The employer arranges for the lease payments to be taken directly from the employee's salary, meaning they can reduce their taxable income. The employee will generally need to stay employed throughout the lease period and have an employer that supports novated leasing.
• Business loan. You can also use standard business finance to fund the purchase of a new car. You have a range of options available with business finance, including a term loan and a line of credit.
• Car loan. Many regular car loans may also be available to businesses, although they do not include tax benefits you get when you finance a business vehicle.

How do I decide which business car loan is right for me?

You may be wondering which financing option would be the best for you.

Before comparing business car loans, you should consider the following questions:

• Do you want to retain ownership of the vehicle? Some financing options give you ownership of the vehicle once you start repaying the loan, but others only grant ownership at the end of the loan term. Some, such as finance leases, are not intended to grant ownership at all. Consider whether you want to be able to claim the vehicle as a business asset when considering your business car loan options.
• What is the purpose of the vehicle? If you will be using the vehicle often, then you may want to consider a car loan that gives you a new vehicle at the end of the term (finance lease) to avoid overuse. This is also applicable if you're planning to replace the vehicle within that time frame.
• What is your business situation? The choices available to you depend on whether you are a sole trader or part of a company. For example, a novated lease is only available to employees, which means sole traders are unable to apply.

What are the benefits and drawbacks of business car loans?

As with all loans, there are benefits and drawbacks to consider when you take out a car loan for your business.

We've listed the pros and cons of business car loans in general, as well as the pros and cons of leasing and buying below:

Pros

• Tax benefits. Your business could receive tax benefits. You can claim GST credits on the purchase price of your vehicle. You may also be able to deduct expenses such as interest on your vehicle loan, fuel and oil, repairs and depreciation costs, among others.
• Flexible repayments. You could select a repayment schedule that fits your needs and budget.

Cons

• Tax issues. You may need help from a tax agent to understand which benefits apply to you.
• Vehicle ownership. Not all options allow you to keep ownership of the vehicle. This means that your business could be paying for an asset it does not own.

Should I lease or buy a car for my business?

When you lease a car, you are signing a contract which allows you to borrow a vehicle. This contract also includes the average number of kilometres you can drive every year. Once your lease has expired, you could either buy the car or lease a new car.

When you buy a vehicle by using a loan or your savings, you are purchasing the vehicle outright.

Whether you take a loan to buy or lease a car, you will be making regular repayments over the term of the loan. Both of these options come with their set of pros and cons, which we've listed below.

What are my loan requirements?

To apply for a car loan, you may need to provide:

• Financial statements
• Tax returns
• Cash flow statements
• Proof of ownership of business (where applicable)
• Proof you can pay back your loan
• Proof of insurance for the vehicle
• Personal finances

To be eligible for a business car loan, you need to:

• Be a tax resident of Australia. This means that your business must be registered, based and operating in Australia. You will need an Australian ABN, while also paying taxes in Australia.
• Use the vehicle for business purposes. As part of the loan requirements, you will need to use your vehicle solely or mostly for business purposes.
• Have a profitable business. Your business financials need to be able to prove the profitability of your business. This, in turn, will prove your ability to make your repayments.
• Have good credit. It will be easier to lease or buy a vehicle if you have good credit. Not only do you have a greater chance of having your loan approved, you may also receive a lower interest rate. If you have bad credit, you may have fewer loan options and pay higher interest rates.

What should I keep in mind when comparing business vehicle loans?

Once you've decided which type of business loan you need, you can start comparing your loan options. We've compiled a list of things you need to look out for when comparing.

• What are the features of the loan? This includes the interest rate, comparison rate, length of the loan term and any fees and charges, including balloon payments, that you will need to pay.
• How do I repay the loan? You will need to make regular repayments with any form of vehicle finance, and you will need to factor this into your business's cash flow plan. Look for a vehicle finance option that allows you to tailor repayments to suit your cash flow. Some finance options, such as commercial hire purchase, may require you to make a lump-sum balloon payment at the end of your loan term, which you will need to factor into your budget.
• What are the tax implications of the loan? Claiming the expense of buying a vehicle for your business as a tax deduction varies greatly depending on which vehicle finance option you choose. For example, a chattel mortgage will allow you to claim interest charges and the depreciation on the vehicle as a tax deduction, while under a finance lease you can claim a deduction for the whole of the lease. Always check with your accountant, as deductions may be subject to individual or business circumstances.

Tips to get the most out of your business car loan

• Chat with an accountant before you apply. There are a number of car financing options available to businesses and an accountant can help you decide which may work best for you. Accountants can also tell you which part of the finance—the interest and the rental payments—are tax-deductible to help inform your decision.
• Negotiate your repayments structure. Lenders can offer monthly, quarterly, half-yearly or annual repayment terms, or even repayments structured around your cash flow. See how flexible the lender is before you apply and negotiate terms based on your business needs.

Are there any risks involved with business car loans?

As with any financing option, it is important to ensure that you don't choose a business car finance option you can't afford. Factor in the cost of the vehicle, the regular repayments and the length of the loan term. Consider your long-term cash flow to work out if the repayment size is manageable for your business.

Another common pitfall is simply not understanding the range of vehicle finance options available and selecting one that doesn't suit the needs of your business and its budget. Enlisting the services of an accountant can help you find the business car finance option that is right for you.

When getting a car loan for your business, you'll need to sign a business purpose declaration. This allows you to claim your loan payments as valid business expenses, but may mean you also lose some rights granted to individuals under credit law. Only take out a business car loan if you are definitely intending to use the car for business purposes only.

How can I apply for a business car loan?

Once you've worked out which type of business car loan works for you, you can start comparing loans. Keep in mind the benefits, drawbacks and risks while selecting. Once you find a loan that meets your requirements, you can click "Go to site" or "Enquire now". Having all your documents at hand will make the application process easy.

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Frequently asked questions

• What's the difference between a novated lease and a fully maintained novated lease?

  A novated lease is where an employee enters into a finance lease with a financier, but your employer makes the monthly lease repayments from your pre-tax income. Under a fully maintained novated lease, your employer will use your pre-tax income to pay the lease repayments and the vehicle's operating expenses.

• How can I work out the best choice tax-wise?

  This is where an accountant can help. The right choice will depend on your business and your business finances, so getting some expert help is the way to go.

Justine Mclean is a business finance expert, author, speaker, financial educator and host of the Secrets of Successful Business podcast. With 30 years of experience in small business, Justine is on a mission to help business owners increase their financial literacy, build solid financial foundations and create profitable and sustainable businesses.

Justine released her book Become A Business Money Magnet - Simple habits to manage your money and supercharge your profits in 2024; she is a registered BAS Agent, Ladies Finance Club Ambassador, and named one of Coach Foundation's Top Female Business Coaches for 2022.

To make sure you get accurate and helpful information, this guide has been edited by Richard Whitten and reviewed by Justine Mclean, a member of Finder's Editorial Review Board.

Written by

Sarah Megginson

Head of editorial

As an authority on all things personal finance, Sarah Megginson is passionate about helping you save money and make money. She is an editor and money expert with 20 years’ experience and an extensive background in property and finance journalism. Sarah holds ASIC RG146-compliant Tier 1 Generic Knowledge certification, and she's a regular media commentator, appearing weekly on TV (Sunrise, Channel 7 news, Nine news), radio (KIIS FM, Triple M, 3AW, 2GB, 6PR) and in digital and print media. See full bio

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