Understanding Business Car Loans
Business car loans are finance for vehicles that are predominately used for commercial or business purposes. There are many products available. Finance is available in the form of a loan or lease with the vehicle securing the loan. Terms for business car loans are generally between one & seven years. Many tax advantages are available with business car loans. Certified accountants can advise on specific business tax benefits & government incentives like the $150K instant asset write off scheme.
Where to find best Business Car loans
There are many lenders with a multitude of options available for business car loans. There are the four major banks and many nonbank lenders. The increasing number of lending institutions has brought new competition to the once monopolised banking industry, so it pays to shop around. Many non-bank lenders offer attractive rates. Dealership finance is also offered with business car purchases. Dealership finance may appear attractive with low interest rates but often these are misleading. (refer to our blog: Avoid Dealership Vehicle & Equipment Finance). Consumers need to be aware of fees and charges to calculate and compare the options available with business car loans. When comparing business car loans, the rule is to always compare your monthly repayment figures as some lenders may hide fees in the repayments, this allows some lenders to advertise super low rates. Always try to compare apples with apples. An experienced finance broker will help with sourcing the best loan or lease and defuse any complexities.
PAYG’s may be eligible for Business Car Loans
Business car loans are not restricted to self-employed and business entities. Eligibility for business car loans is available if 51% or more is for work purposes. Certified accountants and Australian Taxation Office (ATO) can give more advice with tax claims. If seeking finance, business car loans are well worth consideration. They are more cost saving than personal or consumer loans.
Type of Vehicles that qualify for Business Car Loans
NEW OR USED
With business car loans there is not many restrictions with the type of vehicle. Sedans, station wagons, utes and vans are the types of vehicles commonly financed. Heavy vehicles like trucks, trailers and buses, along with agricultural and construction equipment can also make use of business equipment/car loans.
Most lenders preferred new vehicles purchased from dealers. The vehicle is usually the security for the loan. As a result, lenders view new vehicles as lower risks. Finance for second-hand cars is available but comes at a slightly higher interest rate. Most lenders will finance vehicles up to seven years of age. There is some exception with lenders known to allow borrowing for vehicles up to fifteen years of age. A specialist vehicle and equipment finance broker will be able to advise more about finance for older vehicles.
Types of Business Car Loans
There are various types of business car loans and leasing options available. In this guide we classify the finance types into the following categories: Chattel Mortgage, Hire Purchase, Novated Lease and Rental loans.
Chattel Mortgage also known as an equipment loan. This is a lending facility with a term of 2 to 7 years and is secured by the asset that is being purchased. Chattel Mortgage has fixed interest over a set term for amounts up to $250K. Often there are tax benefits as the asset is owned by the borrower. At present the $150K instant asset write off scheme is a COVID-19 tax incentive the government has extended till December 2020. With chattel mortgage the borrower is responsible for all associated costs like registration, insurance, repairs and maintenance. Most lenders allow 100% of the lending to be financed so no deposit is required.
Benefits of Chattel Mortgage or Equipment Loan
This finance provides significant benefits for not only sole traders and small business operators but eligible PAYG employees who use their car for 51% or more for work. The vehicle is immediately owned by the borrower. Generally no deposit or capital outlay is required. The vehicle is used as security. This means there is no need for property collateral. Repayments at fixed rates are required monthly. This makes budgeting easier. There are many tax benefits also, like goods and services tax (GST) may be claimed. Depending on your operations, some or all of the interest and depreciation costs are tax deductible. These loans are usually more cost effective than personal loans. They have better rates, terms & conditions.
Who is suited for Chattel Mortgage or Equipment Loan?
This finance is ideal for small business operators, tradies, professionals, consultants and contractors whose car usage is at least 51% for work purposes.
With hire purchase the customer chooses the vehicle of their choice. The vehicle is owned by the lender. Repayments are made to the lender by the customer. These repayments are made over a set term at a fixed interest rate. The term of hire purchase is generally one to five years. On completion of repayments the customer has the option to take ownership of the vehicle. This allows use of the vehicle without affecting the business balance sheet or cash flow. Usage of the vehicle needs to be at least 51% for business.
Benefit of Hire Purchase
With hire purchase there is no eroding of working capital. The GST component of this finance is a possible deduction. There are however, other tax benefits. Consultation with a registered tax agent or accountant will be able to give more details. Budgeting is made easier with hire purchase as there are known repayments. These repayments are at a fixed interest rate. The terms of contract are flexible and negotiable with most lenders.
Who is suited for Hire Purchase?
Hire purchase is beneficial when a business does not want the asset recorded on their balance sheet. The usage of the vehicle must be over 50% for work purpose. Only Australian businesses registered with GST with a current ABN can apply.
A novated lease is a three-way agreement between a lender, employer and employee. The finance forms part of the staff member’s salary package. This means there are advantages for the employer and employee. The employer deducts regular payments from the employee’s pay over a fixed term. These payments include an estimated running cost. These running costs may be adjusted if required. Any excess at the end of the lease is returned to the employee. There can be a balance or commonly referred to as a balloon payment at the end of the term. The employee has the option to payout or refinance the balloon or residual at the end of the term of the loan. Unlike chattel mortgage this finance is available for vehicles for sole personal use but also business or part business use. Payments are divided into two portions, a pre-tax (gross) salary portion and the post salary (net) portion. Novated lease payments uses an Employee Contribution Method (ECM), which is the post tax portion negating the Fringe Benefit Tax.
Benefits of Novated Lease
Often car dealers give companies bulk discounts, which means employees save on purchase price. This also allows an employee to save GST on the purchase. Another saving is a portion of payment is pre taxed. This results in a reduction of the employee’s taxable income. The employer is responsible for a direct payment to the lender. This is another advantage as the employee does not have to handle any transaction and will not miss an instalment.
Equipment Rental Loans
An equipment rental facility is a business car loans agreement between a lender and a borrower. The lender agrees to purchase the asset and the borrower agrees to rent the asset from the lender over a set period of time. The terms of the loan are usually in line with the life of the asset. In many cases the lender also gives the borrower the option to own the asset at the end of the term.
Benefits of Equipment Rental Loans
Rental loans have flexible contract terms. This finance suits customers that have one off project that need special vehicles. Rental loans can be short term. This can preserve capital on vehicles that may not be needed for other projects. Repayments are fixed, assisting the business budget. Some tax benefits may be applicable. Registered tax agents or accountants will be able to advise more. A residual or balloon can be used to lower the overall rental expenses of the loan.
Who is best suited for Equipment Rental Loans?
This finance is suitable for business owners that do not want a long-term commitment with business car loans. Rental loans can also suit businesses or contractors that need specific vehicles for a one off project.
Types of Business Car Loans
|Loan Type||Term Years||Features|
|Chattel Mortgage||2 to 7||Ownership, Tax benefits, Fixed interest rate|
|Hire Purchase||1 to 7||Preservation of working capital, fixed interest rates, GST & tax benefits, flexible contract term, option to own at end of term, vehicle is security|
|Novated Lease||1 to 7||Attractive for employers & employees to minimise PAYG tax and not have the burden of managing an entire fleet of vehicles|
|Rental||1 to 7||They are flexible contract terms. Preservation of capital, known payments.|
The complexity of car business loans and leases can be overwhelming and confusing. The expertise of an equipment finance broker who specialises in business car loans can often explain and clarify these complexities. It is worth seeking a quote and advice from an expert equipment finance broker. They could save you time and money. For a small fee they can often get the best rates and fastest approvals. A business car loan broker does the hard ‘yakka’. They negotiate best deals, process applications and arrange all documentation. They are not tied to one bank or institution so the broker can source competitive deals. Their service & knowledge can be invaluable with sourcing the right lender and product for your specific financial needs.