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Your options for financing a car through a business

Alex Ritchie avatar
Alex Ritchie
- 6 min read
Your options for financing a car through a business

If you’re considering financing a vehicle for work purposes, you may be curious as to what your options are, and which may best suit your needs and financial situation.

In Australia, there are multiple business vehicle financing options, with a range of lenders and car dealers looking to help business owners nab a set of wheels. Business car loans may also provide potential tax benefits, and can come with a range of ownership options too. 

Let’s explore some of the common options for financing a car through your business.

Financing a vehicle through a business

Business car loans

One of the most straightforward options to consider is applying for a company car loan in your business’ name. The application process can be more streamlined than other options as, depending on your lender, you may be able to do so online. 

With a business car loan, you will repay the borrowed amount through periodic instalments over an agreed period - typically one to seven years. Alternatively, you may opt for smaller repayments initially and a lump sum payment at the end of the loan duration, also known as a balloon payment. 

You will have to provide proof of income and evidence of the trading history of your business to allow the lender to determine your eligibility for car finance. This can include:

  • Australian Business Number (ABN) – Registered for the last two years.
  • Business financial statements - This may include profit and loss statements, balance sheets and business activity statements (BAS), for the last two years.
  • Tax return statements - For the last two years.

Additionally, you may be able to claim your interest charges on the car loan as a tax deduction - as long as the car is used for business purposes.

Chattel mortgages

Chattel mortgages are similar to a secured car loan, however they are only available for vehicles used for business purposes at least 50% of the time. Like a standard business car loan, you will pay off the debt over a set period (typically one to seven years), and be charged interest, as well as any applicable fees, by the lender. Some lenders may allow repayment based on the cash flows of your business, while others may offer fixed equal instalments payable over the loan term.

One benefit of a chattel mortgage is that unlike some other financing options, after you pay off the debt you will have complete ownership of the vehicle. You may also be able to claim the GST you pay on the vehicle in your next BAS (if you’re registered for GST). Additionally, the interest you pay and the depreciation of the vehicle may also be claimed on your BAS, as it is considered a business asset. 

Commercial hire purchase

A commercial hire purchase is where a lender will purchase a vehicle you wish to own, and loan it back to your business until the borrowed amount is repaid. After the loan amount has been paid off, the ownership will then be transferred to your business. 

Like a business loan, you will make repayments over a fixed term. Additionally, you may be able to claim your hire purchase repayments as a tax-deductible operating expense. 

Finance lease

With a finance lease, the vehicle financing company purchases the car 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. With a finance lease, the repayments are typically charged a fixed interest rate, meaning the interest charges and your repayments will not fluctuate.

Operating lease

An operating lease is similar to renting a vehicle for business purposes. Unlike a 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. At this point, you may opt to lease the car again, or consider other options.

The lender will offer you exclusive ability to use the vehicle over your lease term. This can be a competitive option for businesses that need to regularly upgrade their vehicles, or simply keep an asset like a car off their books. 

Novated lease

This is a three-part agreement between an employee, an employer and a lender that allows employees to buy a car using their pre-tax income. The employer arranges for the repayment to be deducted from the employees’ salaries through a salary sacrifice agreement.  

In this scenario, the business will borrow the funds from a leasing company and repay them over a set period of time, with payments coming from the salary of your employee utilising the vehicle. 

Typically, a novated lease may allow your employees access to a car at a lower monthly cost. They will generally only pay for the actual usage and vehicle depreciation, as opposed to a traditional loan repayment. Also, most novated leases include the cost of ongoing expenses. 

However, the employee does not have ownership of the vehicle. At the end of the novated lease term, there is generally a residual amount to pay, which could be done through opting for a new lease, extending the lease and refinancing, or paying off the balance to purchase the vehicle outright. 

Which car financing option should you choose for your business

As you can see, there are several options to finance a business vehicle. It may be worth asking yourself some questions to determine which option is the best fit, including:

  • Do you want to retain ownership of the vehicle?
  • What is the primary use of the car?
  • What are the tax implications of this financing option?
  • What is the financial situation of your business, and what can you afford? 

For example, if you want to retain ownership, an operating lease may not be the right choice. Similarly, novated lease is available only to employees, and if you are a sole trader, you may not be eligible for this 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. It may be worthwhile speaking to your accountant for their advice before you make a decision. 

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Product database updated 14 Apr, 2024

This article was reviewed by Personal Finance Editor Peter Terlato before it was published as part of RateCity's Fact Check process.