Many entrepreneurs find it difficult to keep their business’s finances solidly over the breakeven point, much more than acquiring an asset as expensive as a business vehicle.
That said, you may find it to be the right time to scale (or jumpstart) your operations and get a business vehicle to help you take your business to the next level.
Whether it’s for increased staff mobility or a higher cargo load, a vehicle is an excellent asset that can help you streamline your business in several ways.
If you’re in dire need of a business vehicle, but lack the immediate capital to purchase one, this article will give you some tips to help you in your journey of car financing.
Let’s jump straight into it.
Table of contents
1. Evaluate your business finances
Before seeking out financing options, it’s essential to sit down and truly think about the timeliness and necessity of this purchase.
A car is undoubtedly a useful tool, but getting one should be hinged on a calculated business decision, not a decision made at the spur of the moment. You want your business to not just stay afloat, but to unlock new potential growth avenues through this purchase.
As such, it’s important to assess your financial data before pushing through with a purchase or leasing agreement. Is your business attaining enough profits to justify the decision?
A quick look at your business bank account, your cash flow statements, and financial projections can give you enough evidence to help validate the feasibility of this move.
If you have a financial department and co-founders, consider getting their input on the financial viability of this acquisition as well for a better perspective. The last thing you’d want is to get financially stifled by the excessive repayment terms for years on end.
Don’t forget about the depreciation and ongoing fuel and repair expenses you’ll likely have to deal with as well. Having a car is an obligation that can be both limiting and liberating in various aspects of your business, so be sure to weigh these factors carefully.
2. Learn different car financing types
There are many ways you can secure funds to own a business car. From loans to hire purchase agreements, these car financing options can help you in your journey towards business car ownership.
Here are the most common types of car financing to consider for your business:
- Secured auto loans: The lender owns the vehicle until the borrower finishes paying the entire term. Buyers enjoy lower interest rates due to them providing collateral in case of a default.
- Unsecured auto loans: Usually require buyers to pay higher interest rates due to a lack of collateral.
- Chattel mortgage: This type of secured loaning agreement is one wherein the car is the loan’s security. Buyer owns the car outright, but the lender takes the mortgage first—providing tax benefits. Westpac goes into more detail about this financing method.
- Hire purchase: The lender owns the vehicle and grants the borrower an opportunity to use it with a flexible, agreed-upon down payment amount. Ownership is only transferred when all payments have been made.
- Personal contract purchase: PCP is similar to a hire purchase arrangement but with an option at the end of the term to make a balloon payment for a car ownership transfer or to return the car.
- Dealer financing: Dealerships may provide 0% down payment or other enticing terms like low-interest rates or cash-backs to incentivise buyers to buy their car. Terms vary per dealership.
- Novated lease: Triple-party arrangement where employers make payments on behalf of the employee by deducting part of their salary. This is to increase the tax benefits of the employee.
All these options are viable ways to finance a business car. Just like with other assets, you can also consider borrowing from friends, gaining funding from angel investors, or applying for grants.
If you’re unsure of the best way to finance a car, you can consider talking to a finance professional for useful insights on the best approach for your specific business.
3. Understand that leasing is an option
While there are clear perks of owning your vehicle (or working towards car ownership), leasing is a viable alternative for businesses who only want the temporary utility of a vehicle or who are still on the fence about committing to a car purchase.
Leasing a car allows you to test different car models, granting you first-hand knowledge of the way certain vehicles perform and how they can fit into your operations.
It’s also cheaper than paying for rent-to-own repayment terms, allowing you to save more capital in the short term. Typically, maintenance costs and depreciation are shouldered by the lender in the leasing agreement—reducing the need for cash outflows over the term period.
Furthermore, the flexibility of switching to newer models with better technology is also present in leasing. This is unlike paying for a car which you’ll be stuck with until you decide to liquidate it.
If you want to undergo a “trial” period before purchasing a vehicle, or simply want to make predictable budgets, then you can consider leasing as a viable solution for your business’s transport and logistical needs.
4. Scour for the best deals
While the type of arrangement may have some similarities, different lenders offer different interest rates and terms.
As such, it’s important to take the time to shop around to find the best deal. Ask around from various banks, credit unions, and other potential lenders and keep track of their offers.
Besides finding the lowest interest rate, look into lenders who have good term lengths and fewer additional fees. These factors can be weighed and assessed by your business, which can help you find the most suitable financing deal for your company.
5. Improve your credit score
Your credit score can play a significant role in influencing your car loan terms. If you have a good credit score, you can get attractive loan terms like lower interest rates and more unsecured loan options.
However, if you have a low credit score, the chances of getting a good unsecured loan deal are near zero. Even getting a secured loan deal might be tough or leave you with bad repayment terms.
Having said that, it’s important to be mindful of your credit score. Making late payments, maxing out credit cards, and being in a lot of debt can all accrue and leave you facing rejection after rejection from lending institutions.
As such, be sure to be more thoughtful with how you spend your credit.
6. Utilise tax benefits and cost-saving measures
Your vehicle financing expenses don’t stop at the down payment and monthly terms. You also have to factor in gas, maintenance costs, and depreciation when the time comes to liquidate the car.
While these ongoing costs are troublesome, there are tax benefits that can spin these costs into something positive. For one, you no longer have to pay tax on things like gas and repair expenses if the car is purely used for business purposes. Even interest rates can be tax deductible.
Furthermore, depreciation can be treated as an expense, which can give you some more tax benefits. That said, you have to declare these expenses accurately before you can claim them as rebates, so be sure you do so to benefit from this perk.
7. Review your financing option regularly
The business landscape is a dynamic space, and it’s common for businesses to encounter high highs and low lows.
If you’re experiencing a different financial and economic situation than you did in the past, it’s important to factor in this situation when making new directional changes for your business.
Review your financing arrangements annually and decide whether the vehicle still meets your needs or is cost-effective.
Perhaps you can find a more favourable rate with your better credit score, change the leasing arrangement to a rent-to-own one, or maybe you can look into cutting the contract short altogether.
By being proactive with your vehicle financing strategy, you’ll help optimise your business’s financial health and ensure that its gears are turning to the tune of outward market conditions.
Hope we’ve helped!
