Get access to the funds you need to buy your next business vehicle with these vehicle finance solutions.
The right vehicles are essential to the functioning of many businesses, offering the mobility and portability you need to operate successfully. However, when it comes to finding the funds to purchase your next business vehicle, there is a wide range of vehicle finance options you can choose from. These options include a lease, a commercial hire purchase, a chattel mortgage, a novated lease or even a personal loan. Each option has its own benefits and drawbacks, so read on to discover which one is right for you.
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What is vehicle financing?
The term vehicle finance refers to a series of borrowing options to help you find the funds you need to buy your next car. Just as personal buyers have access to a range of options when seeking financing to buy a car, business buyers can choose from several ways to access the cash they need to buy commercial vehicles.
However, choosing the approach you take for your business will depend on a range of factors including your financial situation, your taxation needs, and whether the vehicle will be solely used for business purposes or whether it will be needed for a mixture of business and personal use.
How does business car financing work?
Vehicle finance is designed to kick into action when you don’t want to pay for a vehicle upfront. Instead, financing a car purchase lets you use the vehicle in question and pay it off over a period of time, similar to how you are able to live in a home even while you are paying off your home loan.
However, the way commercial vehicle finance works will depend on the approach you take. Some options, such as a car lease, allow you to lease a vehicle from a financier, while other options take on a more traditional lending arrangement. Read the following section on the types of vehicle finance to learn how each option actually works.
What are the types of vehicle finance?
- Finance lease. This option allows your business to enjoy the use of a commercial vehicle and all the benefits of ownership, however the financier retains vehicle ownership. How it works is that the lender purchases the vehicle on your behalf, and then leases it back to you. You then make monthly lease payments until the term of the lease is up, at which time you can pay off the remaining value on the lease and take full ownership of the car, trade the car in or look to refinance the lease.
- Commercial hire purchase. Under this arrangement, your business hires a car from a financier for an agreed period. You’ll have to make fixed monthly repayments during this period. While your business does not own the vehicle during the hire term, you take ownership once the hire term is up and you have paid off the total price of the vehicle and any interest charges.
- Chattel mortgage. A chattel mortgage involves a financier lending you the money you need to purchase a vehicle, meaning you become the owner of the vehicle once it has been purchase. But the financier then takes out a mortgage on the vehicle as loan security, thus reducing the risk of lending you money. Once the contract is over, the mortgage is removed.
- Novated lease. A form of salary sacrificing, a novated lease involves an agreement between an employer, an employee and a financier. It involves the employee entering into a finance lease with the financier, but in this case, the employer takes on the employee’s role of making repayments under the lease. The employer looks after the monthly lease rentals from the employee’s pre-tax income, and the vehicle is available for the employee to use. A ‘fully maintained novated lease’ is also available, under which the employer looks after the lease repayments and the vehicle’s operating expenses from an employee’s pre-tax income.
- Personal loan. A personal loan gives you access to funds you can use for any purpose, ranging from taking a holiday to buying a car. This is an option if your car will be used for both personal and business use, but it should really only be a last resort as personal loans tend to attract higher interest rates and fees than other options.
How do I compare business vehicle finance?
- Terms. The length of the term of your vehicle finance arrangement will influence how much money you have to pay in order to gain ownership of a commercial vehicle. Many finance options allow terms of between 12 months and five years, so compare the terms available and find an option that suits your budget and needs.
- Interest rate. What interest rate will you be charged under your vehicle finance arrangement? The higher the rate, the more you’ll have to pay in interest charges. Will the rate be fixed or variable, offering either the security of knowing what your repayments will be or the chance to take advantage of falling rates?
- Repayment options. Look for a vehicle finance option that allows you to tailor repayments to suit your budget. Some offer fixed monthly repayments which provide security, while others may allow you to choose a more flexible repayment schedule.
- Tax requirements. Claiming the expense of buying a vehicle 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.
- Fees and charges. As with any financial product, it pays to familiarise yourself with any fees and charges attached to a vehicle finance option. They may not seem like much at first, but these expenses can add up to a lot of money in the long run.
What are the benefits and drawbacks to consider?
- Wide range of options. There are vehicle finance options available to suit a wide range of businesses.
- Possible tax benefits. Depending on how much you spend and the loan option you select, your business may be able to benefit in terms of tax.
- Flexible repayments. Choosing the right finance option enables you to select a repayment schedule that suits your needs and budget.
- Confusing. The finance options available can make finding the right loan confusing. Navigating tax issues can also complicate things.
Are there any risks involved?
As with any financing option, the most important thing to avoid is getting in over your head. The last thing your business needs is to have debts piling up on top of one another, so make sure you can afford a vehicle finance arrangement before you sign up to it.
Another common pitfall is simply not understanding the range of vehicle finance options available and selecting one that doesn’t suit your business’ needs and budget. Enlisting the services of an accountant can help.
Questions you might still have
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 for the lease repayments and the vehicle's operating expenses.
Which finance option is right for my business?
A wide range of factors can influence the answer to this question, so seek expert and tailored advice from your accountant.
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