Updated: July 26, 2022
There are several reasons you might want to buy a vehicle for your business. If you run a business that deals in logistics, chances are you need a fleet of vehicles for your basic functions. However, even if your business does not require deliveries or travel, you may want to buy a vehicle for day-to-day use.
Having a business vehicle allows you to send employees to take care of administrative matters. It also makes it easier to meet with potential partners and clients. You may even decide that you need a van or truck to carry out occasional deliveries or to run a mobile branch of your business.
Unless you have thousands of dollars in capital available, you are going to need to find a way to finance your vehicle or fleet of vehicles. What is the best way to go about financing business vehicles?
Buying vehicles outright
Even if you are unable to get big loans for other purposes, you may be able to buy vehicles by taking out a loan from a bank or private lender. This is because the vehicle acts as its own security.
The benefit of financing your vehicles this way is that you own them immediately. Yes, they are at risk if you are unable to pay the loan, but you can use them as you wish from the start. However, you might struggle to get even a secured loan big enough to buy a fleet of vehicles outright.
For this and other reasons, many business owners turn to leasing.
What does it mean to lease a vehicle?
Leasing a vehicle can take many forms. Finance leasing refers to the lender buying the vehicle and then leasing it to you for a fee every month. They own the vehicle, and you have access to it through your monthly payments. Most finance leases (but not all) are signed with the intention of you owning the car once the value is paid off.
Another popular type of leasing for business owners is an operating lease. In this case, you pay for use of the vehicle without the intention of ever owning it. This is a useful way of financing a vehicle for a business owner who simply needs to get the job done. The cost of an operating lease is lower than the cost of a finance lease, and while you will never own the vehicle or fleet, you won’t have to deal with resale costs either. You can continue leasing indefinitely, with the responsibility of upgrades on the lender.
If your employees want the use of a company car, you can get a novated car lease. This refers to an agreement between the lender, employer, and employee to take a certain value from the employee’s salary every month to pay for the use of the car. It comes from their pre-tax income, and the employee, therefore, pays lower taxes.
Small business loans
A secured loan is always going to be the most attractive type of loan, due to its low-interest rates. However, you can choose alternative loan options for financing your vehicle if necessary. Private lenders may give you a small business loan with which you can finance your vehicle. You can secure this loan with other assets or guarantors, or you can get an unsecured loan that will come with high-interest rates.
One other type of loan you can use to finance vehicles is a business line of credit. A business line of credit works like a credit card, in that you pay back only what you use. This is not recommended, as business lines of credit come with high-interest rates. However, if you have no better alternatives, you may consider taking this approach.
The best way to finance a vehicle
There is no standard answer as to the best way to finance a vehicle. If your business will benefit from owning the vehicles (or if that is a non-negotiable) both a secured loan and a finance lease will get you there, if in different ways. If there is no benefit to actually owning the vehicles, an operating lease should do.
While there is no objective best way to finance a vehicle, there are financing options you should avoid if possible. High-interest unsecured loans might seem attractive when you need quick money, but they are all too likely to get your business stuck in a cycle of debt. You can come to regret this sooner rather than later, especially if you could have used the vehicle to get a secured loan.
Make sure you crunch the numbers in full (or have your actuary do it for you) before you commit to financing vehicles. In the context of your business, certain types of financing may end up costing you more than they are worth. These vehicles are meant as a resource, and should not be a contributor to your business’s downfall.
Ultimately, the choice is yours of whether you require a vehicle for your business, but be sure that financing it won’t cause you problems.
This article is written and contributed by Jeremy Biberdorf.
What to do next: Click here to subscribe to our FREE newsletter.