Vehicles are an essential part of many businesses, large and small. That’s why there are many options available on the market to finance a commercial vehicle, or a whole fleet of them.

The first step is always to identify the specific needs of your business and be clear on what the business can afford.

Remember, purchasing vehicles comes with automatic ongoing costs such as registration, insurance, maintenance, repairs, and sometimes unexpected costs owing to accidents or misadventure.

It’s important to do your research on exactly what vehicles your business will need and the going market price for them before you speak to any dealers. Sometimes the price of a vehicle under finance may be higher than the advertised market rate for it to cover a lower interest rate or the cost of other benefits thrown into the deal.

In other words, be armed with knowledge and be prepared to negotiate to get yourself a good outcome.

See also: How to negotiate buying a car

It’s wise to get quotes on various financing options and compare them. Ask for specialist financial advice to ensure you’re covering all the bases. Your accountant is a good place to start as they will often be able to provide a tax perspective or make you aware of other considerations that may affect your decision.

When it comes to financing your purchase, the best solution will be what fits the needs and circumstances of your business and its operations. Let’s run through some options.

Purchasing your business fleet with cash

Some businesses may consider purchasing their business vehicles outright from working capital. While that may seem like a good idea for a business with healthy capital reserves, vehicles may not always be the best investment. Spending money on vehicles and their ongoing costs quite simply means there is less cash for other business operations.

Then there is the matter of depreciation. As any car owner knows, vehicles lose value as soon as you drive them out of the showroom. To a business, a wholly owned fleet is an asset base that is going to depreciate annually.

As well, there are ongoing costs that will also need to be covered through working capital, no matter what financial circumstances the business may be facing in the future.

Many large and small businesses consider using capital to purchase a fleet of vehicles an inefficient use of business funds and look to obtain finance under terms and conditions that are going to best suit their needs.

When is purchasing outright a good idea?

That said, there may be some circumstances when purchasing a vehicle outright is viable. This can be when the business needs a specialist vehicle imperative to its operations or one that requires modifications to meet its needs. In this case, owning the vehicle outright may be a viable option.

But even in these circumstances, many businesses may look to obtain finance rather than paying for the vehicle in one upfront sum out of capital reserves.

Let’s check some of the finance options.

Extending an existing business loan

Sometimes businesses may be able to extend an existing loan to cover the cost of a vehicle or vehicles.

This can often be at a far more competitive interest rate than specialist vehicle finance through a finance company or other lender. However, the business may end up paying more for the vehicles over the longer term as the broader loan can effectively swallow up any extra payments it’s making for vehicles.

In some cases, taking out a separate loan or a specialist commercial car loan for a shorter period may prove more economical, even if it comes with a higher interest rate. It pays to consult your finance specialist or business accountant for advice on what would be preferable for your circumstances.

If you decide to go for a separate car loan, here are a few options.

Taking out a standard business loan

Many lenders offer business loans that can be used to fund any purchases, including vehicles. There are many options on the market which means interest rates tend to be competitive and terms and conditions can be flexible.

You can also choose whether to take out a secured loan (using the vehicles as security for the loan) or an unsecured loan which generally come with higher interest rates.

Some businesses may prefer the unsecured option because it cuts the risk of the vehicles being repossessed in the event of repayment default.

Interest costs on a standard business loan can be tax deductible and the borrowed funds can also be used towards other business needs, not just vehicles.

Dealership finance

The dealership you purchase the vehicles through will most likely offer you finance via its finance company.

This can be a loan option, but you need to do your sums and due diligence to understand the terms and conditions of what you’re being offered.

Ensure you check the term of the loan, what fees are entailed, the interest rate you’ll pay, and whether there is a residual or ballon payment involved. Essentially, a ballon payment is an agreed-upon lump sum payable at the end of a vehicle loan (usually around 30-50% of the loan amount). While it effectively cuts down regular repayments over the course of the loan, the considerable ‘balloon’ amount must be paid at the end.

Some dealer finance can also come with maintenance plans, additional warranties, insurances, and other extras included as conditions of taking up the loan.

These may not always be the most economical or suit the particular needs of your business. Ask for a quote on dealer finance before you make any decision so you can compare it with other options.

See also: The 6 car dealership finance traps to avoid

Chattel mortgages

Another option is what’s called a ‘chattel mortgage’ where a lender essentially provides the business with a secured loan to purchase a vehicle or fleet (the chattel/s).

This works much the same as a home loan. The business will purchase the vehicles and will pay the lender back over the agreed loan term, with interest. If the business defaults on the loan, the lender can repossess the vehicles.

There are several tax advantages to a chattel mortgage for businesses, including claiming the following:

  • GST credit on the purchase price

  • full input tax credit

  • interest paid on the loan repayments

  • depreciation tax breaks (up to the depreciation limit)

Interest rates on chattel mortgages are generally fixed so you know what the business will be up for during the life of the loan.

However, one drawback is that if circumstances change and the business no longer needs the vehicles, it will still need to pay the loan on them - or a face a hefty termination fee.

As well, because the vehicles are secured assets, the business risks losing the vehicles if it can’t meet the loan repayments, even if they are essential to the business’s ongoing survival.

See also: How to apply for a business car loan

Commercial hire purchase

The major difference between a standard loan or chattel mortgage is that under a commercial hire purchase agreement, the lender will purchase the vehicles on your behalf and essentially hire them back to the business.

The business makes the agreed payments over a fixed term and when the last payment is made, the business takes over formal possession of the vehicles.

One advantage of a commercial hire purchase is that it can give almost immediate use of vehicles because the lender buys them on your behalf.

However, as with a secured loan, if the business is unable to meet the scheduled repayments, the lender can repossess the vehicles.

For chattel mortgages and hire purchases, businesses can still be entitled to make tax deductions for depreciation, interest, and running costs as well as claim GST input tax credits upfront. An instant asset write-off deduction may also be claimed but only if certain requirements are met.

See also: How you can finance cars for your business

Leasing business vehicles

The other popular option that many businesses take up is to lease their vehicles through specialised commercial vehicle leasing companies.

Leasing comes with the advantage of the business not having to put down any significant upfront payment and many lease agreements also cover the ongoing running and maintenance costs associated with the vehicles. This can effectively average out vehicle costs over a set term, making it easier for businesses to budget and ease cash flow uncertainty.

Some businesses also like that their vehicle fleet remains updated as leased vehicles can be automatically turned over for newer models at the end of an agreed period.

There are still tax benefits that can be claimed on leased vehicles although the business will never own them so they can’t be counted as a business asset for financial purposes. Leasing companies may also not allow any modifications to the vehicles to suit a business’s specific needs.

See also: Leasing vs buying a car for your business

Just as there are many finance options for businesses looking to purchase their vehicles, there are different types of lease agreements that need to be carefully considered before going down that path. Let’s consider the main ones.

Operating lease

An operating lease is much like a rental agreement where you only pay for the use of the vehicle. The leasing company will purchase it and take it back at the end of the lease term. The leases generally include all the essential vehicle operating costs and come with shorter terms, providing for regular vehicle upgrades.

Finance lease

Much the same as a commercial hire purchase agreement, under a finance lease, the leasing company will purchase the vehicle on your behalf and the business will pay regular instalments that go towards eventual ownership of it.

At the end of the lease, businesses can pay out the remaining amount and take ownership or, alternatively, can renew the lease and upgrade to a newer vehicle. This arrangement can suit businesses looking for some equity in their fleet and generally longer leasing terms than an operating lease.

Novated lease

This is a lease arrangement that can be offered as an employee benefit. Under a novated lease, the business deducts lease payments from an employee’s pre-tax salary for a vehicle of the employee’s choosing and its associated expenses.

Not only does this effectively reduce an employee’s taxable income but it also reduces the business’s payroll tax. However, it will likely see the business hit with a fringe benefits tax.

From a business perspective, it can shift responsibility for vehicle-related expenses onto employees rather than the business having to pay for and administer the costs of maintaining a fleet. However, like most business vehicle options, novated leases can suit some businesses better than others.

Savings.com.au’s two cents

There is no one-size-fits-all option when it comes to financing a business fleet. The many alternatives come with their own pros and cons and these need to be carefully weighed up, taking into account cash flow, tax considerations, and the goals of the business.

It’s wise to seek specialist financial and tax advice to arrive at the best alternative for your business. Your accountant is a good place to start to run some numbers and ensure you understand any tax implications that may come with choosing one option over another. As with most business decisions, there is usually more to be considered than figures alone.

If you’re after some unbiased advice, the federal government’s business advisory website business.gov.au provides a good source of reliable information on whether to lease or buy vehicles and other business equipment. It also provides links regarding insurance and tax information.

As with all business dealings, make sure you research the companies you’re negotiating with to make sure they’re reputable and always shop around to compare deals. For many of the finance alternatives, you are not locked into them forever, so it pays to regularly review your situation as agreements expire or your business needs change.

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