Having extra cash to purchase commercial vehicles outright is a luxury most businesses can’t afford. That’s why many lenders and dealerships offer a range of financing options to facilitate equipment finance purchases – these can help ease cash flow, provide tax benefits and allow you to afford a better, more reliable and useful vehicle.
When purchasing a new or used vehicle for your business each finance option available has its own unique characteristics that will impact your business. When searching around you’ll most likely encounter the terms chattel mortgage, finance lease, novated lease and operating lease as these are the most popular options. In this article we explore what exactly each of these mean and their pros and cons to assist in your decision-making.
In broad terms a lease is a contractual arrangement calling for the lessee to pay the lessor for use of an asset. Property, buildings and vehicles are common assets that are leased. There are three common types of vehicle leases: the operating lease, the finance lease and the novated lease.
A finance lease is where you pay to use the vehicle, much like a long-term rental agreement. The lessor takes the risk on the purchase and resale of the vehicle, and it frees up your business capital that may otherwise be tied up with ownership of the asset. Your business pays monthly instalments, or rental payments, that go towards the car, you then pay out the residual value of the vehicle at the end of the lease or your business simply returns the asset at the end with no resale value risks.
A novated lease is a unique employee-benefit arrangement that involves you, your employee and a financier, and can last between one and five years.
It’s a form of ‘salary packaging’ that helps finance new or used vehicles by repayment obligations made from an employees pre-tax salary. This can effectively reduce your taxable income and also can allow you to bundle your vehicle’s expenses into one simple payment.
An operating lease is a rental agreement used to finance a vehicle for less than its useful life, with the vehicle able to be returned to the lessor at the end of the lease period without any further obligation. It has a shorter term generally than its lease counterparts, due to this you are able to upgrade to a new vehicle regularly. You may even be able to do this whilst the lease is still active. The difference between an operating lease and a finance lease is that the user will not be able to buy the vehicle during the period of the lease.
When it comes to car finance, a chattel mortgage is a very popular option among business owners and operators. A chattel mortgage has a similar structure to a fixed-rate traditional mortgage whereby the finance provider uses the vehicle as the security for your loan. Chattel refers to the car or equipment, and mortgage refers to the loan. Unlike a lease it gives you ownership of the vehicle right away and you then pay off the loan from the income the asset generates in your business. If you’re unable to meet your repayments, your finance provider may be able to repossess your vehicle.
There’s a lot to digest with these chattel mortgage and lease options and it can seem overwhelming when looking to source finance for business equipment, that’s why we’re here to help!
If you need assistance evaluating the above, get in touch today with one of our commercial vehicle finance specialists on 1300 755 494 and we can help find the best loan option for your business, or if you’d like to get started now you can apply online using our simple platform here.