How Can Small-Scale Enterprises Easily Secure A Business Car Loan?
Around 96% of all Australian companies and businesses are considered small-scale enterprises (SMEs) with fewer than 20 employees. So you can imagine their contribution to the economy of Australia.
The Australian government continually regulates laws and policies in favour of small businesses. The Australian Taxation Office (ATO) has giant lists of tax deductions on business motor vehicle expenses, bank fees, and depreciation concessions for these ventures.
Even after that, there’s one thing that SMEs dread the most. And that’s the rejection of a loan application. A bad credit report, tight budget, and irregular cash flow can really make it difficult to secure a loan. More often than not, such organizations end up paying a higher rate of interest than larger companies owing to their bad credit report.
As a small-scale enterprise, you would want to expand your business. Therefore, purchasing assets such as heavy equipment or vehicles can help increase your radius – which means more income and business for you. So, how will you proceed with that?
Let’s, see. You buy a car by paying the full amount in cash and get immediate ownership. That seems like quite a plan. But the problem is you might have emptied if not all, most of your capital. So the next feasible option is to get a business car loan.
What is a business car loan and how does it work?
A business car loan refers to different commercial finance options designed to specifically suit the needs of enterprises and employees. It helps cover the cost of getting a truck, van, fleet, or any other vehicle for business use.
It is available for all types of enterprises – ranging from small to large businesses.
If you’re looking to get a vehicle for commercial purposes, business car loan rates are usually lower than that of personal ones. And at the same time, you can also claim tax deductions. That's something, isn’t it?
Given its flexible range of structures and repayment options, a business car loan seems more feasible than the other. But deciding that you need a loan is only the first step towards it. There are a few things to be considered while applying for one:
- Repayment option - Know your budget and cash flow structure. It’s always better to look for a financing option which allows you to tailor your instalments according to your budget. Some offer fixed monthly amounts while others have a more flexible payment schedule.
Loan Term - The contract period determines the total money you would have to pay to get the full ownership of a commercial vehicle. Usually, the tenure varies from one to five years. So always compare the various term alternatives and choose one that suits your budget and requirements.
Interest rate - The higher the rate, the more the interest charges. The most important thing to consider is whether the rates are flexible or variable. This decision affects your stability of repayment and overall cost of the loan. It always depends on how much free cash flow your business generates after you've paid all your expenses, including the periodical instalments.
Fees and Charges - There are always fees attached to a business car loan which make it look unattractive and increases your cost. Always familiarise yourself with different kinds of charges to be on the safer side. These may include – application fees, exit or discharge fees, termination charges, or service fees. Each of them can add up to a lot in the long run.
Tax consideration - Tax deductions include the repayment amount, but depreciation deductions depend on the type of loan you choose. Claiming the expenses of buying a vehicle as tax deduction varies considerably according to the financing option.
Are there any risks involved?
The finance company will look at your business profile to evaluate the risks involved in giving you a loan. They will validate your ability to repay the full amount. So if you have an unsatisfactory credit report, does that mean you’re not getting the loan? No. It may get difficult, but it doesn’t have to be impossible.
How to increase your chances of getting a bad credit car loan
Offer security – Giving your residential property as security will gain the lender’s trust and improve your chances of getting car finance.
Find a co-signer – If you have a partner or any business associate with a good credit report, you can convince him or her to co-sign your application.
Take no further debts – It can hurt your business to see debts pile up. Make sure that you can afford a car finance arrangement before you sign up for it.
Moreover, there are many business car financing options, specially curated for small businesses.
What are your other small business financing options and which one is best suited for you?
Generally, there are four types of business car loans with their unique benefits. You just need to weigh up your requirements against each alternative and choose the one that fits.
The four categories, along with their structure and benefits, are listed below –
- Commercial Hire Purchase
Under this arrangement, a lender buys the desired car on behalf of the business owner and rents it back to him/her for a fixed monthly instalment over a set period. The customer uses the vehicle but doesn’t own it. At the end of the contract term, once all payments including the residual amount have been made, the title passes to the client.
The contract term usually varies from one to five years. If your business can account for GST, commercial hire purchase would be worth considering as you can claim GST on the vehicle price, fees, and interest.
- Novated Lease
A novated lease is a three-way agreement involving an employer, employee (the client), and a financier. Your employer makes the lease payments on your behalf, and you own the vehicle under a contract. At the end of your lease term, you gain complete ownership by paying the residual value to the lessor.
It is the right option considering you’re a business employee who wants to finance a vehicle through a salary packaging arrangement with your employer. The best part is that if you decide to leave the job within the contract period, the lease can be transferred to your new employer.
Since payments are done on your pre-tax salary, you save a significant amount on your tax payments.
- Finance Lease
A finance lease is just like commercial hire purchase, but with a key difference. In the former, at the end of the contract period, you can either return the vehicle or make an offer to purchase it. This is an advantage for businesses who want to own luxury vehicles without spending a considerable amount of capital.
The benefit is that no deposit is required; so you can preserve your cash flow and also save money for taxation purpose. You can claim the full repayment as a tax deduction, depending on the amount of commercial usage of the asset.
- Chattel Mortgage
A chattel mortgage is a commercial finance product that allows your business to take full ownership of the vehicle once the payment has been settled.
The advantages include flexibility in how you make your repayments to suit your cash flow. You can also claim tax deductions on interest and depreciation depending on the amount of business utilization of the asset. You can also claim GST on the purchase price of the asset according to your tax setup.
Now that you know the different methods of financing a car for business purposes, securing a loan should be quick and uncomplicated.
Conclusion: Plan your business purpose and vehicle loan
I know it may look like a lot of work, involving enormous research and drawing your budgets. But if you’re looking for an easy way to get your business car loan approved, you need to be thorough with your financial history. The financier is going to ask you for in-depth information about your venture.
Although it may seem like you have a detailed plan ready to discuss with the financier, seeking advice from your accountant before approaching the lender is always beneficial.
Even if you’re an SME, the bottom rule is to choose the best loan option that suits your requirements and increase your chances of getting it approved.
Whenever in doubt, please always seek advice from your accountant before entering any financial product.