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Car Leasing and vehicle financing

by Angus Jones

Your business needs a vehicle and you do not have the spare cash to buy it outright what options do you have?  This guide will look at the options for a car leasing.

WHY do you need a Car Lease?

Your vehicle is a representation of your business and indeed maybe your key means of earning revenue.  Unfortunately not too many businesses have enough cash to buy a vehicle outright so vehicle financing must be sought.

WHAT are my vehicle financing options?

Business loan – a financial institution lends you the purchase price.  If your business is brand new you will likely need to provide some personal guarantees

Credit Card – high interest and reduces your credit limit

Car Lease – essentially you rent the car for a period with the option to buy at the end. Great for freeing up money that can be spent on other things

Hire Purchase – similar to lease but the asset is owned by the business after the last payment is made

Chattel Mortgage – business car loan where the vehicle is security for the loan

Car Subscription Service –car provided for a fixed weekly payment with the option to swap or stop subscription with short notice.

Long Term Rental – fixed cost for a fixed term and may or may not include insurance, fuel, and maintenance.

HOW do I decide if car leasing is right for my business?

If a new vehicle is required every 3-5 years, leasing is a suitable method.  Remember a newer car will be more reliable and give a good impression of your small business. Some leases may have a balloon payment at the end of the lease or you have the option to buy outright.

A car lease does not necessarily have to be a direct cost to the business.  A small business owner may decide to allow employees to salary package a novated lease.

 Put simply, a novated lease is a car finance package that allows your employer to make lease payments for you from your pre-tax income for the term of a lease whilst you are still employed. This has the effect of reducing your taxable income, which in turn, reduces your income tax. 

Most often a lease will include running costs such as registration and servicing.  The employee will be liable for Fringe Benefits Tax (FBT) that is based on a forecast that uses the value of the car and the distance of your business travel vs personal use to determine an amount. https://www.ato.gov.au/General/Fringe-benefits-tax-(fbt)/

If the business takes out the lease there are two options, a Finance Lease or Operating Lease. With a finance lease the vehicle is bought by a finance company and rented out to the lessee over a lease period. At the end of this period, the lessee is obligated to either purchase the car from the finance company by paying the residual value or lease the car again. Operating leases are like a finance lease, except the lessee is not responsible for the residual value at the end of the lease – the car is simply handed back to the finance company. Some businesses with a high turnover of vehicles use operating leases to reduce administration costs.  Operating leases can include all costs for a fixed monthly payment.

Your accountant can help you understand the costs of buying vs leasing.

HINT

For a business, depending on circumstances of use and current legislation, lease payments are tax-deductible. The car leasing advantage is a more predictable cash flow. This method of financing a vehicle should not affect the borrowing power of the small business significantly for other purposes. If you are eligible, the GST contained in the car’s purchase price may be claimed back by the lender, only the vehicle’s price exclusive of GST is financed, lowering monthly payments https://www.ato.gov.au/business/gst/in-detail/your-industry/motor-vehicle-and-transport/gst-and-motor-vehicles/

When making your decision do not take the first deal offered to you, different companies will offer different prices. Make sure the leasing company is reputable and last but not least be realistic about how much you can afford each month.

SUMMARY – compare companies for car leasing

Car leasing is a cost-effective way to get your business mobile without having to borrow money. Ensure your business or individual can support the payments and that you compare leasing companies to get the best deal.

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