Different car finance options for business
There are three car finance options, if you are using a car for business use only: a chattel mortgage, a low doc loan and an operating lease. A novated lease can be used for buying cars on your employees’ behalf.
A chattel mortgage means your borrow money from the lender to purchase the car. The car is used as security against the loan. Depending on your situation, you may have the option to borrow the full amount, or pay a deposit. You may also have the option to bring down your monthly repayments by setting a residual value, or final balance.
Generally, chattel mortgages are very flexible, and offer a range of lending periods, from two to five years. Talk to your tax adviser to find out if this is a tax advantage for your business, as you may be able to claim tax credits, or claim interest paid on tax.
A low doc loan means you require less documentation to borrow the car. This might be a good solution for sole traders or small business owners. You must be able to prove the car is only used for business use, under this arrangement.
An operating lease means the lender purchases the car and leases it to you. The advantage of an operating lease is that the lender assumes responsibility for risks associated with ownership. You pay regular instalments, like rent, for the period of the lease. At the end of the lease period, you have the option to renew the lease, update the vehicle, end the lease, or purchase the vehicle at a fair price.
A novated lease is an arrangement made between an employee, an employer and the lender. The lender purchases the car. The employer takes a fixed amount of the employee’s pre-tax salary each month, and pays the lender. Employees can use the car for personal and business use.
If you are an employer, you may have the option to purchase the employee’s choice of car at a fleet discount, which is not available to individual buyers. You then work with the payroll department to set up the employee’s pre-tax salary deductions. There may be tax advantages of using a novated lease to finance cars for employees. This can be a great option for rewarding your employees, which promotes staff retention and loyalty.
How do you decide?
The car finance solution you choose for your will depend on the use of the car/s, and your tax situation. Book a chat with me, and speak to your tax accountant to work out which solution suits you.