Everything you need to know about business car loans

Whether you want to upgrade an old car or purchase a new ute to expand your operations, a business vehicle loan can help you acquire the necessary transportation without draining your finances upfront. In this comprehensive guide, we'll explore the ins and outs of this type of business finance. From the common uses to the pros and cons and the application process, here's everything you should know.

What is a business car loan?

A business car loan (also known as a chattel mortgage) allows you to purchase a vehicle to use for business purposes while spreading the cost out over time. This could be a car, truck, van, or ute, for example.

You'll own the vehicle from the get-go, but it will serve as collateral for the loan. This means that if you fail to repay it, the lender can take possession of the vehicle. Once you pay off the loan, the vehicle becomes entirely yours, without any further obligations.

Common uses for a business vehicle finance

Business vehicle loans can be used for:

• Upgrading older vehicles
• Purchasing new vehicles
• Expanding your business
• Reducing the amount of cash spent on high-value items

The pros and cons of getting a business car loan

Business car financing may not be the right choice for everyone, so it's important to carefully consider both the benefits and the drawbacks:

The pros

• Frees up cash for other areas of the business. With a business car loan, you can spread the cost of the vehicle over time instead of having to pay it all upfront. You can retain cash and invest it in other areas of the business, like marketing, inventory, or day-to-day expenses.
• Existing debts don’t usually affect approval. With most car loans, the vehicle itself acts as collateral, so there's less risk involved. While your lender will still consider your business's financial health (including current debt), they'll likely place more emphasis on the vehicle's value.
• Can sometimes qualify for government tax incentives. If you purchase a vehicle for your business, you may qualify for tax benefits such as depreciation or interest deductions [1]. There are also eco-friendly incentives to consider if you opt for an electric or hybrid model [2].
• Interest rates are often lower than unsecured loans. Since business car loans are secured, they present a lower risk for lenders and, as a result, tend to carry lower interest rates.
• Selling your old vehicle can give you a cash boost. If you already own a business vehicle, you may be able to sell or trade it in to help finance the new one—whether to use it as a down payment or to reduce the loan amount.

The cons

• Stricter terms compared to unsecured loans. Secured loans typically have more rigid payment terms because of the higher value of the loan and the collateral at stake.
• Early loan payouts may incur fees depending on the lender. If you choose to settle your loan ahead of schedule, you may have to pay an early payout fee. This is a prepayment penalty some lenders charge to make up for the interest they forgo when you pay off the loan early.
• Some lenders may include extra charges. Business car loans sometimes come with additional charges (like origination, banking, and maintenance fees) that can easily add up and make the loan more expensive than you anticipated [3]. Be aware of these potential fees and get the terms sense-checked by a professional (like one of our lending experts) before signing off on anything.
• If the vehicle’s value drops, you might owe more than it’s worth. The value of vehicles depreciates over time, but if that happens quicker than expected, your loan balance may end up exceeding the vehicle's market value [4].

How much can you borrow for a business car loan?

This will depend on factors like your lender's policy, your creditworthiness, your revenue and cash flow, and your business plan. With Valiant, though, the minimum loan amount is $5,000.

How to apply for business vehicle finance

The process of securing vehicle financing includes a few key steps:

1. Determine your business needs. Based on this, decide whether you need a car, truck, or van, for instance, and whether to choose a new or used piece of equipment.
2. Gather your financial statements. Lenders will want to assess documents like your business's tax returns, business activity statements, and cash flow forecast—so make sure everything's ready and up to date.
3. Research and assess lender options. Compare your options, paying close attention to interest rates, loan terms, features, and those hidden fees we mentioned before.
4. Prepare and submit your application. Different lenders will have different criteria and documentation requirements, so what this step entails will vary depending on who you opt for.
5. Examine the loan terms. If approved, it is crucial to carefully review the terms of the loan agreement to avoid any unpleasant surprises.
6. Formalise the agreement. Once you're happy with the agreement, sign it to receive the funds and proceed with the purchase of the vehicle.

This application process can be a lot to get your head around, particularly if you don't deal with business loans on a daily basis. The good news is, we do.

At Valiant, we believe accessing business finance shouldn't feel like a climbing a mountain, so we make it straightforward and fast. We connect you to lenders that offer financing solutions tailored to your needs. Then, we handle the application process and settle funding on your behalf.

Our platform compares finance from over 90 lenders, both banks and non-banks, so there's a wide range of options to choose from. Get in touch today.

Is it better to lease or buy a vehicle for my business?

The debate between leasing vs financing is a common one, and there are pros and cons to both approaches. With leasing, you don’t need a down payment or security, and the repayments are lower than if you were to get a loan. Plus, vehicle lease payments are typically tax deductible. However, leasing comes with mileage restrictions (and hefty charges if you go over them), and you may incur additional costs to pay for maintenance.

If you decide to get a loan, on the other hand, you’ll end up saving money in the long run, since your loan repayments are going towards an asset you’ll later own. There are also no mileage restrictions, and you can modify the vehicle and use it exactly how you want. But you do need a down payment and the vehicle maintenance is your 100% responsibility.

If you're unsure whether to buy or lease, a lending expert can help find a solution that works for you at a great rate. Chat to one for free today.

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References

1. https://www.ato.gov.au/businesses-and-organisations/income-deductions-and-concessions/income-and-deductions-for-business/deductions/deductions-for-motor-vehicle-expenses?=redirected_motorvehicleexpenses
2. https://www.ato.gov.au/businesses-and-organisations/hiring-and-paying-your-workers/fringe-benefits-tax/types-of-fringe-benefits/fbt-on-cars-other-vehicles-parking-and-tolls/electric-cars-exemption
3. https://business.gov.au/finance/leasing-or-buying-vehicles-and-equipment
4. https://static.moneysmart.gov.au/files/publications/car-loans.pdf