Financing a car through a business

Financing a car through a business

There are a number of Australian lenders and car dealers that offer multiple small business vehicle financing options. Generally, business car loans are available with flexible options and can also provide tax benefits.

Business car loans

Applying for a car loan in a business name is simple and may be done online. You will have to provide income and trading history of your business, which allows the lenders to determine your eligibility for small business car finance. You may repay the borrowed amount through periodic instalments over an agreed period. Alternatively, you may opt for smaller repayments initially and a lump sum payment at the end of the loan duration. You may claim interest as a tax deduction as long as the car is used for business purposes.

Chattel mortgages

Chattel mortgages are secured car loans for business use that are repaid over a fixed term. The car is used as security, which means you cannot sell it before the end of the contract. Some lenders may allow repayment based on the cash flows of your business while others may offer fixed equal instalments payable over the loan duration.

Commercial hire purchase

This is similar to financing a vehicle through a business car loan, which is repaid in fixed instalments. The lender will purchase the car and hire it back to your business until the borrowed amount is repaid. However, you will need to pay a certain upfront deposit. Once all the instalments are paid, the car ownership is transferred in your name.

Finance lease

The financing company buys the vehicle and leases it to you for a fixed period. At the end of the lease term, you can pay the residual value and assume ownership, refinance the lease, or trade the car. While financing a car for business use with this option, the payment is fixed and is not affected by inflation.

Operating lease

Unlike the finance lease that allows you to take ownership of the car by paying the residual value, the lender will take back the vehicle at the end of the operating lease term. Generally, operating and maintenance costs are included in the lease amount, which may make it slightly more expensive but is generally more convenient for financing a car through your business.

Novated lease

This is a tripartite agreement that allows your employees to buy a car using their pre-tax incomes. The employer arranges for the repayment to be deducted from the employees’ salaries, which decreases their taxable incomes.

How to decide on the best business car loan?

With several options to finance a business vehicle, ask yourself some questions, like whether you want to retain ownership, what the primary use of the car is, and what the situation of your business is. For example, if you want to retain ownership, a finance lease is not the right option. Similarly, novated lease is available only to employees and if you are a sole trader, financing a car through a business with this option is not an option.

Considering the tax implications is also important as the deductions vary for every option. A chattel mortgage allows depreciation and interest as tax deductions, while you may be able to claim the entire amount if you opt for a finance lease.

Understand the business car loan requirements before applying to ensure a quick and seamless process. Finally, don’t forget to compare various car loan options to find the best way to finance a car through a business.

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What do I need to apply for a chattel mortgage?

Chattel mortgages are a form of secured car loan for businesses. The lender will set up a mortgage, while you take the car’s ownership. When the mortgage is paid off, you own the car. The borrowed amount is repaid through regular installments over a fixed period of time.

To qualify, you’ll have to meet the following chattel mortgage requirements:

  • The car should be used for business purposes at least 51 per cent of the time.
  • You must hold a valid Australian Business Number (ABN).
  • You must show you can service the loan on time
  • Identity proof
  • Financial records, such as profit and loss account and balance sheet
  • Details of the vehicle you want to buy
  • Bank statement for your business

What is a car lease?

A car lease, also known as an asset lease or finance lease, is an arrangement by which a finance company buys a car on your behalf. You get to borrow the car in return for making regular payments to the financier. At the end of the lease, you can either buy the car or hand it back. 

What is an asset lease?

An asset lease, also known as a finance lease or car lease, is an arrangement by which a finance company buys a car on your behalf. You get to borrow the car in return for making regular payments to the financier. At the end of the lease, you can either buy the car or hand it back.

What is a finance lease?

A finance lease, also known as an asset lease or car lease, is an arrangement by which a finance company buys a car on your behalf. You get to borrow the car in return for making regular payments to the financier. At the end of the lease, you can either buy the car or hand it back. 

What is dealer finance?

Dealer finance is a car loan organised through a car dealer – as opposed to car loans organised by a finance broker or directly by the lender.

What is CTP insurance?

CTP insurance, also known as compulsory third-party insurance or a green slip, is compulsory if you want to register a vehicle in Australia. If you’re responsible for a car accident, your CTP insurance will be used to pay any compensation due to anyone who might be injured or killed. However, CTP insurance doesn’t cover you for vehicle damage or theft.

How to apply for pre-approval of a car loan from RACV?

If you’re planning to apply for a car loan with RACV, the best way to start is by having a clear picture of your requirements. By getting pre-approval on your car loan, you’ll be able to go shopping for your new car with a definite budget that will help you narrow your search. Once you’ve decided to buy a car with the help of a loan, you may have even identified the type of car you would like to purchase, you can seek pre-approval on a car loan from RACV. 

You can apply for pre-approval by filling out a form online and uploading the relevant documentation regarding your identification, income, debt and credit history. Once you submit your application, RACV will review and verify the documents. If you meet their eligibility criteria, you will get pre-approval for the amount they are willing to lend to you. With this pre-approval, you can go car shopping with the confidence of knowing what you can afford.

What is a dealership?

A dealership is a car yard or a place where cars are sold.

What is a chattel mortgage fee?

A chattel mortgage fee is an amount you’ll pay the lender to procure the funds for a chattel mortgage.

You can use a chattel mortgage to finance vehicles used for your business at least 50 per cent of the time. It’s similar to a secured vehicle loan. The lender will give you the funds required to purchase the vehicle whilst you retain the ownership. The finance company then holds a mortgage on the vehicle, using the car as the security, until you repay the loan amount. At the end of the loan term or once you’ve paid it off, the lender will release the mortgage. Alternatively, you can opt to trade-in or refinance the residual value.

What is proof of income?

Before giving you a car loan, lenders will ask for proof of income – documentary evidence that you earn as much as you claim you earn. Lenders will typically want some combination of tax returns, pay slips and bank statements. The reason lenders want proof of income is because they want to be sure you have the means to repay the car loan.

What is a secured car loan?

A secured car loan is a loan that is connected to a form of security, or collateral. Generally, the security for a car loan is the car itself. If you fail to repay the loan, the lender might seize your car, sell it and then use the proceeds to recover their debt.

How do you get a car loan?

There are four different ways you can get a car loan. You can go straight to a lender. You can get a finance broker to organise a car loan for you. You can get ‘dealer finance’ – which is when the car dealer organises a car loan for you. Or you can organise your own car loan through a comparison website, like RateCity.

Whichever method you choose, you will need to provide proof of identification, proof of income and proof of savings. So you may be asked for any combination of passport, driver’s licence, bank statements, payslips, tax returns and utility bills. You might also be asked to provide proof of insurance.

Can I buy a car as a student?

Buying a car is a huge financial decision, and shy of marriage and purchasing a house (or perhaps around the world travels), it may be the biggest financial decision you make. But if you’re looking at your empty pockets, don’t despair! Your dream of owning your own car could become a reality, if you look for and compare the right car loans for your circumstances.

What is a car loan?

A car loan, also known as vehicle finance, is money that a consumer borrows with the express purpose of buying a vehicle, such as a car, motorbike, van, truck or campervan. Car loans can be used for both new and used vehicles.