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Finance options for buying a car

If you’re looking to purchase a vehicle for your business, there are a number of different finance options available. Before you enter into a finance agreement it’s important to do some research to determine which finance is suitable for your business structure, as well as understanding the implications for cash flow and tax liability. We explain three of the most common types of vehicle finance for businesses:

Finance Lease

Finance leases are a common form of finance for businesses that update their vehicles on a regular basis. The financier purchases the vehicle on your behalf; you then lease the vehicle from the financier and pay a fixed monthly rent for an agreed period. At the end of the lease many businesses will trade in the vehicle and start a new lease, but there is also the option to pay a residual (final instalment) on the lease and take ownership of the car, or re-finance the residual and continue the lease.

Benefits of a Finance Lease:

  • Monthly rental payments are fixed for the lease period so you can avoid Interest rate fluctuations and budget accordingly.
  • You can continue to upgrade your vehicle at the end of each lease as new models/features become available.
  • GST on the car purchase is claimed back by the financier, so the finance is exclusive of GST, lowering monthly repayments.
  • Depending on the lease structure rental payments may be tax deductible.

Commercial Loan (Chattel Mortgage)

A commercial loan or chattel mortgage generally suits businesses that wish to retain ownership of the vehicle at the end of the loan period. With a commercial loan you source and own the vehicle and the financier lends you the money secured by the asset. With this type of finance arrangement the vehicle is an asset of your business even while you’re paying it off. At the end of the loan period (assuming there is no balloon final payment) you own the vehicle outright.

Benefits of a Commercial Loan:

  • Opportunities for income tax deductions through depreciation and interest charges.
  • Interest rate is fixed over the finance term, plus you can make additional payments that reduce the total interest payable.
  • Ability to reduce monthly payments by making a balloon final payment to free up business cash flow (although there may be fees associated).

Commercial Hire Purchase

Commercial hire purchase finance arrangements suit companies that are registered for GST. You can claim the GST on the purchase price upfront and GST on any Interest charges can be claimed over the life of the loan. With commercial hire purchase the financier pays for the vehicle on your behalf with an offer to hire it back to you in return for regular payments over an agreed time frame. You are hiring with intent to purchase and when the final payment is made the title passes to you.

Benefits of Commercial Hire purchase:

  • Ownership of the asset after the final payment.
  • Opportunities for income tax deductions through depreciation and interest charges.
  • GST on purchase price can be claimed up-front.

If you’re considering purchasing a vehicle for business use, talk to a YML Finance Specialist today.