The Types Of Business Vehicle Financing Explained
Chattel Mortgage – These are fixed-term finance contracts with fixed interest rates for sole traders and small businesses looking to buy a vehicle. Your vehicle acts as security for the loan and the loan term ranges between 1-7 years. Since this is similar to a secured loan, the interest rates are generally lower as compared to most other forms of finance. The tax benefits with this type of vehicle finance are high making it the most popular option, as long as your business use percentage is over 51%.
Line of Credit – A business may be approved for a certain line of credit (LOC) based on its income and credit score. These come in two options- secured LOC’s or unsecured LOC’s. You can then access this credit based on your needs and will only be charged interest on the amount you withdraw. For instance, if your business is approved for a line of credit for $100k, and you need say $40k to buy your vehicle, you can withdraw that amount and will only be charged interest on the $40k that you withdraw. This finance option allows for more flexibility but only the big companies with high turnovers get approved for large amounts. The loan repayment term can last up to 5 years.
Commercial Hire Purchase – This type of finance is similar to the ‘rent to own’ scheme when buying property. What this means is a lender pays for your vehicle, and you would have a fixed term agreement with the lender to repay them. After you’ve repaid the entire amount, you gain ownership of the vehicle. The vehicle will be used as security over the borrowed amount much like Chattel Mortgages and the repayment term usually ranges between 1-7 years. You may have to pay a deposit upfront or have a larger amount pending at the end of the loan term which you have to pay all at once.
Novated Lease – Is a three-way agreement involving an employer, employee and financier. In this option, a financier loans you the amount to buy a car which you pay back using a portion of a particular employee’s pre-tax salary, with their permission of course. This is beneficial to both employer and employee as the employer gains the use of a business vehicle without having to list it as an asset in the company books while the employee essentially gets to own a car by sacrificing a small amount of their salary before tax. This way, they also save on income tax. The downside to this is that since your employee is essentially the owner of the vehicle, they may also use it for personal travel.