What is a business car loan?
Business car loans are structured in similar fashion to a personal car loan, yet instead of the loan being taken out in the name of an individual, it is taken out by the business.
The purpose of a business car loan is to provide a business with the funds necessary to purchase vehicles tailored to achieving business operations. These vehicles may include cars, trucks, vans, or other types of vehicles needed tailored to specific industries.
What types of business car loans are available?
Unlike a personal car loan which generally comes in either fixed or variable rate options as secured or unsecured, business car loans exist across a number of different types. These include:
1. Business car loan
This is a standard loan in which the business borrows money to purchase a car for business purposes and then repays the loan over a set period of time with interest. The interest costs on a business loan can be tax-deductible, as are other items such as the depreciation costs of the vehicle.
2. Hire purchase agreement
In a hire purchase agreement, the business makes a down payment on the car and then makes monthly payments over a set period of time. Once all payments have been made, the business owns the car. Commercial hires also have some tax benefits with interest repayments tax-deductible.
3. Chattel mortgage
A chattel mortgage is similar to a secured personal car loan, with the car serving as security for the loan. The business owns the car from the start and makes monthly repayments over a set period of time. Chattel mortgages are a popular choice for business owners as they allow the business to claim a variety of tax deductions including GST on the purchase price, full input tax credit, interest paid on repayments and tax breaks on depreciation, up to the depreciation limit.
As a rule of thumb, a car can only qualify for a chattel mortgage if more than half of its usage will be for business purposes.
4. Operating lease
In an operating lease, the business leases the car for a set period of time and makes monthly payments. At the end of the lease, the business can return the car, extend the lease or buy the car for an agreed amount. Payments can be tax-deductible as a business expense.
5. Finance lease
A finance lease is similar to an operating lease, except that the business is responsible for maintenance and servicing of the car. Vehicle repayments are again tax-deductible as a business expense.
6. Novated lease
A novated lease is a three-way agreement between the business, the employee and the lender. The employee leases the car and the business makes payments on their behalf, which are deducted from the employee's pre-tax income.
In order to be eligible for a business car loan, all types will typically require an Australian Business Number (ABN) registered for at least 2 years, business financial statements from the last 2 years including a balance sheet, profit and loss statement and tax return statements from the last 2 years.
How to choose the right loan type
When selecting a product, such as a car or two for your business, as we have outlined above, there are numerous financing options available. To make the right decision, you should consider several factors, both regarding the car itself and the method of finance. Ask yourself the following:
What purpose will the car serve?
Choosing the appropriate car type can result in immediate savings. Consider if the car will be used for carrying heavy goods, long-distance trips, or transporting passengers. Keep in mind the expenses associated with car ownership, including insurance, registration, fuel, and maintenance costs, when comparing different car models.
Should you purchase a new or used car?
Do you prefer owning the vehicle?
If you wish to own the vehicle from the beginning, options like business car loans or chattel mortgages may be more feasible. However, leasing may offer more flexibility for businesses since you do not own the car, and servicing costs are usually bundled into the lease fee.
What is your business's financial performance?
Your decision should also be influenced by your business's income and cash flow. For instance, businesses with seasonal income may want to consider a chattel mortgage with repayments aligned with their income flow.
What are the tax implications?
Review the tax breaks that your business can claim, as well as other deductions that can be claimed, to help guide your decision.
If purchasing a significant number of cars, many lenders and dealers offer discounts for fleet purchases. Fleet management companies also offer financing for fleets, whether they consist of cars, trucks, or other vehicles.
Each type of business car loan has its own advantages and disadvantages, and the best option will depend on the specific needs and circumstances of the business.
Benefits and drawbacks of business car loans
Capital preservation: Business car loans allow companies to preserve their capital and invest in other aspects of their operations. This is called opportunity cost.
Flexible financing options: Businesses can choose from a variety of financing options, such as traditional loans, hire purchase agreements, chattel mortgages, operating leases, finance leases, and novated leases.
Tax benefits: Interest paid on business car loans may be tax-deductible, along with other car-related expenses. The Australian Tax Office website provides comprehensive guides on eligibility, requirements and exclusions in regards to tax benefits that can be claimed for business vehicles.
Improved cash flow management: With predictable monthly repayments, businesses can better manage their cash flow and budget for car-related expenses.
Improved credit score: Making timely payments on a business car loan can improve a company's credit score and history, which can lead to better financing terms for future loans.
Interest rates: Interest rates on business car loans can be higher than personal car loans, which can increase the overall cost of borrowing.
Depreciation: Vehicles generally depreciate in value quickly, meaning that the car's value may decrease faster than the outstanding loan balance, leaving the business with a negative equity position.
Ownership responsibility: Across many loan types, businesses are responsible for the maintenance and upkeep of the vehicle, which can add to the overall cost of owning a car.
Restrictions on usage: Financing options such as leases may impose restrictions on how the car can be used, which can limit a business's flexibility.
Early repayment penalties: Some lenders may impose penalties for early repayment of the loan, which can discourage businesses from paying off their loans ahead of schedule.