How do I finance a car through my business?

Updated On November 7th, 2023By Dynamoney

If you are a sole trader, or a small to medium enterprise and require a new car for business use, several benefits can be obtained by taking out a business car loan. Just like any other loan you will be required to pay back the loan on a regular basis, usually monthly over a fixed number of years. In most cases, a business car loan can be applied for online.

To determine your eligibility for business car finance, the lender will require proof of income and the trading history of your business. Normally a business car loan term will range anywhere from 1-7 years. If you are purchasing a used car the loan term may be shorter depending on the age of the vehicle and the lender’s maximum allowed age at the end of the loan term. When considering how do I finance a car through my business, there are four main options to consider when it comes to a business car loan.

Types of business car finance

Chattel mortgage (secured car loan)

A chattel mortgage operates in a very similar way to a standard car loan in that the financier lends you money to purchase a vehicle. However, in the case of a chattel mortgage, the lender places what is known as a ‘mortgage’ over the car, which acts as security over the loan. Repayments in some cases are based on the cashflow of your business, otherwise, they will be a standard fixed monthly amount.

Once the loan has been paid off the mortgage is removed. The downsides of this type of business car loan include the fees and charges often payable for early loan termination and the fact you are not able to sell the car before the end of the loan without paying a penalty fee. A chattel mortgage is also recorded on your business balance sheet which is another factor to keep in mind.

Business car lease

A business car lease effectively operates as a long-term rental. A finance company will purchase the car on your behalf and then lease it back to you for an agreed monthly fee. With this type of loan, the car must retain a residual value (balloon payment) at the end of the leasing period. You can then choose to pay the residual value at the end and assume ownership, or you can refinance the lease, or trade the car in. Payments are fixed and not affected by inflation with a business car lease.

With this type of business car loan, there are several advantages including the option to upgrade the car after a short time period, the ability to claim payments as a tax deduction, and no debt recorded on your business balance sheet. Often maintenance costs are included in the monthly repayments as well. Some potential downsides can be the inability to modify the car and sometimes there might be restrictions on how the car is used and how far it can be driven.

Hire purchase

A commercial hire agreement occurs when a lender purchases a vehicle on your behalf, and you hire it back from them. It allows you full use of the car over the term of the agreement, but you don’t own the car. A hire purchase also affords you the option of a balloon payment which can help reduce monthly repayments.

With this type of business car finance the benefits include the ability to claim depreciation and interest charged at tax time, repayments are GST free and fixed and at the end of the hire term ownership is automatically transferred to you. On the flip side, you will likely have to put down some form of deposit, there are usually fees and charges for early termination and any repairs will need to be paid separately.

Benefits of business car finance when it comes to tax and GST

Business car finance can prove beneficial when it comes to lodging your tax return. Depending on the type of business car loan, in most cases, you can claim interest against your taxable income. Generally, depreciation can also be claimed and given a car can depreciate anywhere from 25% to more than a third of the cost over five years, this can potentially be a sizeable sum. GST paid on the initial purchase price can also be claimed in your tax return and for commercial hire schemes repayments are generally void of GST.

Business car loan eligibility criteria

For all business customers interested in securing business car finance through Dynamoney, we require the following criteria to be met:

• Commercial applicants must have a registered ABN
• You need to have been trading in business for a minimum of 12 months
• You also need to be GST registered

Note: the above criteria apply regardless of whether you are trying to obtain business car finance as a sole trader, or as a private company.

Improve your chances of getting approved for a business car loan

The below steps can help to improve your future and potential borrowing capacity if you are considering applying for business car finance.

Ensure all financial records are accurate and up to date

Concise and up to date financial records provide a clear understanding of your business income and ability to repay a loan. A lender will require this information to ascertain your eligibility. Up to date and accurate information will not only make it easier to apply for a business car loan but will also ensure a smoother, quicker approval process.

Ensure you have adequate cashflow to cover costs

Do you already have a business loan of some description? Either way, it is important to make sure you have enough available funds and cashflow to support a business car loan.

Maintain a good credit rating and history by paying debts on time

Your personal and business credit activity is kept on file by credit agencies for five years. This details everything from the loan you have to repayments made, overdue accounts and debts etc. A finance company will use this information to determine your credit rating and worthiness, so it is important to maintain a high credit rating.

FAQ’S

Can I get a business car loan if I have a bad credit history?

Yes, at Dynamoney we provide business car finance to sole traders, small businesses and companies with a bad credit score. If you know that your credit history is less than desirable, we advise speaking to one of our car finance team who can assist in determining your eligibility and the options available to you. For more information, contact our team today on 1300 001 420