Learn more about business car loans

When you need a vehicle to fulfil business operations, whether a car, ute, truck, motorbike or van, you can take out a secured or unsecured loan to cover the cost. Under Australian car finance options, you may be approved to purchase the business vehicles your organisation needs. However, the interest will fluctuate depending on the type and age of the vehicle. You can also opt for a new car or used car - whatever works for your business banking.

Whether a small business or corporate company, most businesses prefer car finance options with fixed regular repayments or a fixed interest rate. Depending on your business’ accounting method, you may want to factor in potential tax deductions. You should also consider how you will use the vehicle; for example, if you anticipate lots of travel, it’s worth finding a business vehicle finance lender who will let you trade in the vehicle when the lease runs out to save you maintenance costs down the track. Comparing car finance options from different providers can help you determine which one makes the most sense for your business.

Regardless if you acquire a business car loan from a business car lender, specialist asset finance lender or finance broker, you may be required to show proof that the vehicle is used for your business more than 50 per cent of the time. This information allows you to account for vehicle financing costs as part of your business’ cash flow, and also affects any tax deductions you may be able to claim. If you use a vehicle for both personal and business use, you will have to calculate the percentage of use for each purpose.

Generally speaking, business car finance interest rates may be lower than personal car loan interest rates. This is because car loans are typically secured against the vehicle you are purchasing, meaning the lender has an asset they can repossess and sell if you fail to pay back your loan.

A business vehicle loan also may offer more flexible repayment options to meet your business needs and budget, as well as tax benefits (which are outlined below). 

Car finance options in Australia include finance lease, commercial loan, commercial hire purchase, and novated lease. The one you choose depends on the level of ownership you desire, how you want to pay the loan back, and the tax benefits. Read on to discover the difference between each of these finance solutions.

• Finance lease

Under a financial lease, the lender purchases the vehicle from a dealership on your behalf and then releases it to you, meaning they retain ownership of the vehicle. Over the term of the lease, you will be required to make monthly repayments. When the lease is about to expire, you can pay off the remaining value and take full ownership of the vehicle or exchange it for a different one. You also have the option to extend or refinance the lease. A finance lease typically involves lower interest rates but maintaining the vehicle is your sole responsibility. Additionally, you may be eligible for tax deductions on the lease payments.

• Commercial loan

Also known as chattel mortgage, this car finance option involves a lender lending you money to buy a vehicle. You will maintain full ownership of the vehicle and make regular instalments to the mortgage lender. The lender will use your vehicle as collateral or security (making it a secured car loan) and will remove the mortgage when the contract ends.

Commercial loans may involve a balloon payment, which is the final scheduled payment on the mortgage. Lenders will likely suggest that the balloon payment should at least equal the vehicle’s resale value, which gives you the option to make the payment and keep the car, or exchange the car for a different one and adjust the payment as necessary.

Additionally, with a commercial loan, you may be eligible for tax advantages. For example, during the term, you can declare the vehicle as a business asset and claim an instant asset write off. This is a tax deduction that effectively translates to your business vehicle, making you money. Tax deductions can also apply to the interest you pay and the balloon payment.

• Commercial hire purchase

This car finance option combines features of a finance lease and a commercial loan. The lender owns the car for an agreed period, as in a finance lease, but you can opt for a balloon payment to keep the rental instalments low. Just like a commercial loan, you may be eligible for tax deductions on the interest and the balloon payment. Businesses sometimes opt for a commercial hire purchase over a commercial loan based on whether they want to present the vehicle in their accounting as a cash flow item instead of an operating asset.

• Novated lease

Suitable for a salaried professional with prior permission from their employer, a novated lease enables employees to lease a vehicle with their pre-tax income. The employer coordinates the lease payments so they are taken straight from the employee's salary, reducing their taxable income. As a general rule, the employee will need to stay in the job for the duration of the lease.

There are two finance options when it comes to novated leasing: an operating lease where you don’t own the car at the end of the lease period and a finance lease where you take ownership of the vehicle once the full payment is made. Either way, the lease payments are deducted directly from pre-tax wages, which may bring down your tax liability.

To apply for a business car loan, you must, firstly, meet the lending criteria. Eligibility requirements for financing a car through business include:

• Being a tax resident of Australia—your business must be registered with an Australian Business Number (ABN), and be based and operating in Australia.
• Using the vehicle for business purposes—you will need to use your vehicle solely or mostly for business purposes.
• Having a profitable business—you need to be able to prove that your business is profitable, which, in turn, demonstrates your ability to meet your repayments.
• Having a good credit score—this increases your chances of having your loan approved, and may even help you get a lower interest rate. If you have a bad credit score, you may be stuck with fewer loan options and/or incur a higher interest rate to make up for the additional risk a lender is making.

Meet all these eligibility requirements and ready to start the application process? Make sure you have the following documentation on hand, as you may need to provide it for evaluation purposes:

• financial statements
• cash flow statements
• tax returns
• ownership of business (where applicable)
• evidence you can pay back your loan
• vehicle insurance
• personal finances.

Before you kickstart the application process for business vehicle finance, you should also confirm that the lender you are applying to offers the loan amount and terms you desire. If you’ve chosen the vehicle you want, you’ll need to know how you need to borrow from the lender.

Yes, as mentioned earlier, you’ll need an ABN to proceed with financing a car through your business. This (free) unique 11 digit number identifies your business to the government and community, and is a key eligibility requirement for borrowers.'

Do you need a registered company for a business car loan?

No, you don’t need to have a registered company to take out a business car loan. You can be a business under any structure, and at any stage of your business journey (e.g. start up or established). Just ensure your business is operating under a valid ABN if you want to take advantage of these finance products.

It’s important to compare business car loans, to ensure you pick the right one for your business needs. Here are the factors you should consider:

• Interest rates: The length of your financing term can affect the interest rate you are offered, and different lenders offer different interest rates for loan periods.
• Fees: These can span administration, establishment, and servicing the financing option. Knowing these upfront will save you unpleasant surprises later on. If your desired business vehicle finance involves you borrowing the vehicle, you should investigate if you need to buy vehicle insurance as a precondition for availing the financing.
• Length of loan: Choosing the length of your loan may require an examination of your business’ projections, to gauge if any new financial obligations might arise. For example, will you need to renegotiate your business vehicle financing terms to allow you to hire more vehicles? Additionally, if your financing option involves a balloon payment, a longer loan term could result in the balloon payment dropping below the resale value of the vehicle, which your lender may not like. Ideally, the length of your loan should stagger the instalments evenly for as long as possible.
• Making repayments: No matter what business vehicle loan you choose, you will need to make regular repayments, which need to be factored into your business' cash flow plan. Finding a car finance option that lets you tailor repayments to suit your cash flow is extremely valuable. Another point to consider is that some car finance options, such as commercial vehicle hire purchases, may require you to make a balloon payment at the end of your loan term, which you will need to incorporate into your budget early on.