How commercial car loans work: A comprehensive guide for business owners

If you’re an Australian business owner or sole trader looking to buy a new vehicle, you may be eligible for a commercial car loan.

Just to be clear, commercial loans can be used for any type of vehicle - cars, vans, utes, trucks - as long as it's going to be used for business purposes.

Commercial car loans: Step-by-step guide

Here’s how some of Australia’s most popular commercial car loans work.

Step 1. Understanding different types of commercial car loans 

Chattel mortgage 

A chattel mortgage is a secured business loan used to purchase 'moveable' assets, including cars, using the asset itself as security. It's generally the most common type of loan that businesses use to purchase vehicles.

Under a chattel mortgage, the business takes immediate ownership of the vehicle while the lender has the right to take possession of it if the business defaults on their loan repayments - much like a standard home loan arrangement.

Chattel mortgages sometimes go by other names, such as equipment loans, goods loans, bill of sale, or even simply commercial loans or secured car loans.

These mortgages typically have lower interest rates than unsecured car loans with loan terms between one and seven years. It's worth noting lender may also offer lower interest rates for funding the purchase of an electric or low-emissions vehicle.

Pros and cons of a chattel mortgage

Pros

• Immediate ownership: The business owns the vehicle from day one.
• Tax deductions and GST benefits: Businesses can claim interest costs and depreciation deductions which may help reduce their taxable income. If the business is registered for GST, it can also claim the GST on the purchase price. 
• Flexible terms: Chattel mortgages generally offer terms between one to seven years and often have the option of a balloon payment at the end, reducing regular repayments. (More on balloon payments below.)
• Lower interest rates: Chattel mortgages generally have lower interest rates than unsecured loans

Cons

• Asset depreciation: Not all businesses may want to own a depreciating asset. Tax implications need to be considered to suit each business's circumstances.
• Reduced flexibility: When you own an asset, it can restrict your ability to upgrade it. It generally means selling and repurchasing which can take time and effort - and may cost more in the long run.
• Balloon repayment option: This can ease the cost of the loan by reducing regular repayments but the large final payment will loom at the end of the loan period. This may put pressure on business finances if planning for it is inadequate.
• Ownership and maintenance costs: By owning an asset, you are also solely responsible for its maintenance, insurance, running costs and eventual disposal. These costs must also be considered.

Some of the lowest rate secured car loans on the market now:

Other finance options for commercial cars 

Business loan

If a chattel mortgage isn’t the right commercial car loan for your business, a more traditional standard business loan may be able to provide the funds needed.

While business loans can be secured (making them similar to a chattel mortgage), they can also be unsecured which means the lender will provide funds that aren't tied to a specific asset. As we've covered, unsecured business loans typically come with higher interest rates. 

Business loans can come in all shapes and sizes. They generally start at just a few thousand dollars and extend into the millions, with loan terms varying between a couple of years to decades.

Pros & Cons of standard business loans for purchasing a car

Many of the same pros and cons that apply to a chattel loan can equally apply to a secured business loan.

However, there are a few additional pros and cons that may apply depending on the business loan's structure:

Pros

• Greater flexibility: The sheer number of options available for businesses looking to secure finance through a business loan can make it a more flexible and customisable way to finance a commercial car than a chattel mortgage.
• Can finance more than the vehicle: A standard business loan can provide additional funds above the cost of the vehicle. This can help businesses get through a financial tight spot or be put to other purposes to maximise the benefit of a new vehicle purchase.

Cons

• May come with higher interest rate: An unsecured general business loan will typically come with a higher interest rate and greater interest cost overall.
• May come without tax benefits: A standard business loan may not deliver the same tax benefits that come directly with a chattel mortgage.
• May come with a longer term: A standard business loan can provide funds for many reasons - to help with cash flow, general working capital, or business expansion. Such loans generally come with a lifespan of decades which can wear down a business's balance sheet over time, well after the vehicle is no longer part of the business. 

Line of credit

Another way a commercial entity can finance a new car – or many – is through a line of credit loan. However, it must be said, a line of credit typically isn’t designed to finance company cars.

A line of credit grants a business access to a set amount of cash, but the business only pays interest on the cash it takes.

Businesses often find themselves at the mercy of ebbing and flowing cash flows and such a product can alleviate some of the stresses. 

How a line of credit loan works for businesses

Say a business is approved for a line of credit with a limit of $100,000. It might use $5,000 to pay an urgent invoice and another $7,000 to purchase equipment. It will only pay interest and repayments on the $12,000 it has used, not the $100,000 it has access to. 

Of course, businesses can also use a line of credit to fund a new company car. 

Pros & Cons of a line of credit loan to purchase a business vehicle

Pros

• Simple and flexible: A line of credit can be an easy way to purchase a vehicle without filling in application documents or needing to put an asset up as security. 

Cons

• Limited loan amount: The amount a business can borrow through a line of credit tends to be less than with, say, a standard business loan, while interest rates are typically higher for line of credits than traditional business loans. They are also typically higher than for a secured commercial car loan.

Step 2. Consider leasing over buying

It wouldn't be a comprehensive guide to commercial car loans without mentioning another popular finance option: vehicle leases. 

One major benefit to commercial vehicle leases is the potential for an outside organisation to manage a business’s fleet – potentially freeing up valuable time and ideally providing consistency when it comes to maintenance costs. 

A downside worth mentioning, however, is that the business leasing the vehicles won’t have any ownership over them, sometimes not until the end of the lease period or not at all.

Commercial vehicle leasing options

There are three main types of business leasing arrangements:

Finance lease

Under a finance lease, a business pays regular fees for use of a car owned by a financier. The business is responsible for all costs associated with running the car but doesn’t own the car itself, nor hold any debt on its balance sheet. 

When the lease expires, the business can choose to purchase the vehicle from the financier for an additional cost - or balloon payment.

Hire purchase

Much like a finance lease, a hire purchase sees a business paying to lease a car, as well as forking out for its upkeep and usage. But there are two major differences:

• First, the business will generally need to pay an initial deposit
• Secondly, when the lease ends, the business will own the car outright.

Operating lease

An operating lease, on the other hand, doesn’t demand a business pays to upkeep or run its car or fleet. Instead, it agrees to pay a single regular payment and simply hands the car back when the agreement comes to an end.

If the business wishes to keep the car afterwards, it might be able to pay an optional balloon payment in exchange for ownership. 

See also:

• Leasing vs buying a car for your business
• Lease a car instead of buying it with a car loan? 
• Understanding fleet financing: Options & advantages for business vehicles 

1. Savings.com.au’s two cents

If you’ve never considered signing onto a commercial car loan before, there can be a lot to figure out. However, commercial car loans are often just as simple as their everyday car loan counterparts. 

Many smaller businesses taking out a commercial car loan will probably have a chattel mortgage, using the vehicle as security against the loan. That said, lease arrangements are also popular choices with many Australian businesses. 

If you or your business is considering taking out a commercial car loan, it could be worthwhile to reach out to an independent expert for advice to see what option would best suit the circumstances of your business set up. 

Step 3. Balloon payments 

Let's look a little more closely at the balloon payment option that comes with many commercial car loans. In simple terms, a balloon payment is a set sum due at the end of a finance agreement. 

Typically, opting for a balloon payment will reduce the regular repayments on a commercial car loan. However, it will see the borrower incur more interest over the loan term, as more debt remains outstanding until the very end.

As mentioned above, some commercial car leasing products also require or allow a balloon payment at the end of the lease agreement, often in exchange for ownership of the car. 

Step 4. Applying for and securing commercial car loans

Of course, the application process for a commercial car loan will depend on the type of financing product a business is aiming to secure, individual lenders, and particular loan terms. 

However, for the most part, it will generally look something like this:

1. Determine the type of finance product required: A borrower would be wise to do their research and reach out to independent advisors if they’re unsure of the commercial loan product that would best suit them, their business set-up, or how such a product would work.

2. Consider eligibility: There’s probably not much point applying for a commercial car loan your business isn’t eligible for. A vehicle purchased with a commercial car loan will probably need to be used, for the most part, for business purposes. A borrower might also need to prove they have an ABN, a good credit rating, a certain trading history, and a sound financial position. 

3. Identify a preferred lender: Every bank and non-bank lender will do things slightly differently. One might offer notable sign up rewards, lower or fewer fees, or better interest rates than another – potentially saving a borrower thousands over the life of their loan. Some lenders may also accommodate businesses of smaller stature than others, while others might not offer finance to small businesses all together.

4. Apply: Before applying for a commercial car loan, be sure to gather any information you might need to provide your lender. These might include:

   • your ABN

   • income statements

   • GST registration details

   • accounts and liabilities

   • details of any additional assets you’d like to use as security

The above is not an inclusive list – be sure to check with your preferred lender exactly what information you’ll need to provide. The lender will likely also want to check the credit history of the borrower, so be ready to answer questions if yours or your business’s is not blemish-free.

See also: How to apply for a business car loan

Step 5. Tax implications of commercial car loans

Commercial car loans, in the form of chattel mortgages, can offer eligible businesses some notable tax benefits.

Mark Chapman

Director of Tax Communications, H&R Block

What the tax expert says

"Your business can claim the GST on the initial purchase price of the asset.

"You can claim depreciation on the asset and all interest payments are tax deductible, but not the repayment of capital."

When it comes to taxation, a business or sole trader is advised to seek out independent professional advice. It also pays to be clear on what the tax implications will be before you go ahead with your purchase.

Step 6. Commercial car loan coming to an end

There’s much to consider when it comes to securing the appropriate commercial car loan but once the product is in place, there’s likely little to do but make repayments. That is, until its expiry nears. 

What comes next will depend on what kind of commercial car loan a business or sole trader has decided to take out. For example, a basic business loan might see a borrower simply make their final payment and go on their merry way.

On the other hand, those with a balloon payment may need to rake together some funds to pay up when their loan ends. 

However, if a business or sole trader settled on a lease agreement, rather than a commercial car loan, they may need to return to their creditor to hand back the keys, choose an updated vehicle, or pay to take ownership of the one they’re currently driving.

Sale and lease back 

But what if a business doesn’t want their commercial car loan to expire? In that case, it might consider a sale and leaseback agreement, or simply leaseback, agreement.

Some creditors or lenders might offer a leaseback option that will see them purchasing the car from the business, that will then lease the car back. 

Leaseback agreements can be an easy way to free up liquidity and remove a depreciating asset from a business’s balance sheet. But they’re not right for every business.