How does business vehicle finance work?
Vehicle finance gives your business access to the vehicles it needs without having to outlay a large sum of money upfront to purchase them outright. Avoiding a large capital expenditure means your business can use that money for a higher-value purpose in running or expanding its operations.
The way vehicle finance works will depend on the type of vehicle finance product. There are a variety of vehicle finance products including leasing, hire purchase and chattel mortgages. The main differences are around the ownership of the vehicle, who is responsible for repairs and maintenance, and how depreciation and payments are treated from an accounting and taxation perspective.
Your accountant is usually the best person to speak to regarding which vehicle finance structure best suits your business.
What vehicles can be financed?
There are lenders and products for almost any type of vehicle. Some lenders offer finance over a broad range of vehicles whereas other lenders stick to more common types of vehicles.
Types of vehicles that can be financed by your business include:
Road
- Cars, including sedans, hatchbacks, utility vehicles, vans, 4WDs and SUVs
- Trucks, trailers, and buses of all sizes
- Motorcycles and scooters
- Caravans
Watercraft
- Boats
- Jet skis
Aircraft
- Aeroplanes
- Helicopters
Mining, agricultural and earthworks
- Excavators, graders, loaders, and bulldozers
- Earth movers, mining, and dump trucks
- Cranes
- Underground transport vehicles
- Tractors and combine harvesters
Heavy and factory equipment
- Forklifts
- Scissor lifts
- Material handling equipment
What are the different types of vehicle finance?
There are a variety of options when it comes to financing business vehicles, and you should always seek professional advice in relation to the best option for your business and it’s needs.
Below are some of the most common types of vehicle finance, including the pros and cons of each.
Finance lease
The terms finance lease and asset lease are used interchangeably. A finance lease exists where the ownership of the vehicle is held by the lessor (finance company) and is permitted for use by the lessee (borrower) for a set monthly fee. At the end of the lease term the vehicle ownership transfers to the lessee (borrower). This may or may not involve a final residual payment paid to the lessor (finance company). During the lease term the lessor would claim depreciation on the vehicle, and the lessee would claim the leasing expense as a tax deduction.
Pros:
- Off balance sheet finance
- Lease expense is tax deductible
- Can include residual payment to reduce monthly outgoings
- You own the vehicle at the end of the lease
Cons
- Unable to claim depreciation on the vehicle while lease is active
- Care and maintenance costs may be the responsibility of the lessee
- Risk of obsolescence of the vehicle is carried by the lessee
- You do not own the vehicle during the lease term
Asset lease
The terms asset lease and finance lease are used interchangeably. Refer to Finance lease above.
Operating lease
An operating lease is like an asset or finance lease, with the exception that there is no transfer of ownership from the lessor to the lessee at the end of the agreement, maintenance of the vehicle is usually the lessor’s responsibility, and the risk of obsolescence is carried by the lessor. The lease agreement would outline the responsibilities of each party, how the vehicle is to be maintained (and who is responsible for what expenses), and any options to upgrade obsolete vehicles. As the owner of the vehicle, the lessor would claim depreciation on the vehicle and the lessee would claim the leasing expense as a tax deduction.
Pros:
- Off-balance sheet finance
- Lease expense is tax deductible
- The cost of maintenance is the lessors’ responsibility
- Options to upgrade if the vehicle becomes obsolete
Cons:
- Vehicle ownership not transferred at end of lease
- Unable to claim depreciation on the vehicle
- Cost is usually greater to reflect maintenance by the lessor and potential obsolescence
- You do not own the vehicle
Commercial hire purchase
This is when the lender purchases the vehicle and then hires the vehicle to you for a fixed repayment (usually monthly) over a fixed period. There may or may not be a final residual or balloon payment. Once the final payment has been made the customer takes ownership of the vehicle. Commercial hire purchase is available when the vehicle is wholly or predominantly for business use.
Pros:
- Vehicle ownership transferred to hirer after final instalment
- Option to repay loan and take ownership early
- Hirer receives interest expense and depreciation benefit for tax purposes
- Fixed repayment amounts and may have option for a residual payment to reduce monthly cost
Cons:
- Owner/vendor may repossess the vehicle if repayments are missed
- Payment defaults may impact your credit score
- Responsibility for repairs and maintenance falls on the hirer
Chattel mortgage
Chattel mortgages are a finance product where the vehicle is owned by the borrower and is taken as security for the loan by the finance provider. The borrower, as the owner, is fully responsible for registration, insurance, maintenance, and running costs of the vehicle. The financial interest of the finance provider in the vehicle is registered on the Federal Government Personal Property Securities Register (PPRS) until the loan has been repaid in full. A chattel mortgage is available where the use of the vehicle is wholly or predominantly for business use.
Pros:
- Vehicle is owned by the borrower from the start, meaning you may be able claim any GST on the purchase
- Lower interest rates
- Can claim depreciation and interest expenses as it is considered a business asset (on balance sheet)
- Flexible terms including loan duration and residual/balloon payments
Cons:
- The loan is secured against the vehicle and may be repossessed and sold if repayments are missed, with the borrower still due for any remaining balance
- Payment defaults may impact your credit score
- Cost and responsibility of repairs and maintenance falls on the borrower
- Risk of obsolescence of the vehicle is on the borrower as the owner of the asset
What are the benefits of business vehicle finance for my business?
The benefits of vehicle finance for your business can include:
- Retain business capital. Vehicle finance gives you the ability to access the vehicles your business needs for a monthly repayment, rather than outlaying the larger capital required to purchase the vehicle outright. Your business may not have the required capital to spend, or you may be able to better utilise those funds to further business growth and expansion.
- Ability to borrow off-balance sheet. In the case of leases, there is no asset or liability shown on the company balance sheet as there is no loan and ownership is with the lessor. This can help your business more easily borrow funds in the future, if required.
- Manage obsolescence risk. In the case of operating leases, your business will not take on ownership of a vehicle which may be outdated at the end of the lease. Some operating leases will allow you to upgrade to newer vehicles which become available.
- Manage repair and maintenance costs. With operating leases, the cost of repairs and maintenance will be the responsibility of the lessor, giving your business certainty and saving you money on any costly or unexpected maintenance and repairs.
- Tax benefits. In the case of chattel mortgages and commercial hire purchase, you can claim the depreciation and interest expenses for your business to reduce your tax expense. If you have a lease, you can claim the entire payment as a business expense.