When it comes to financing your fleet vehicles, each business has unique circumstances which mean that different finance products can make sense. Each finance structure available has different benefits, through either ownership benefits, taxation considerations or risk management.
Here’s some of the main finance options available:
A finance lease transfers the risk of ownership to the business without transferring legal ownership. The business chooses a residual value within the ATO’s specified range to suit you, and at the end of your lease, you can pay it out, extend your term or enter into a new agreement.
A finance lease allows 100% finance leverage at a known monthly cost with no capital outlay. Lease rentals are normally fully tax deductible and treated as lease repayments and interest.
At the end of the lease, you can extend for an additional term, or make an offer to pay out the lease and enter into a new lease agreement on another vehicle.
An operating lease is an asset funding option for businesses that don’t want to take on the risk of selling the vehicle at the end of the lease.
With an operating lease, the finance provider owns the vehicle and leases the vehicle to you with your choice of term and kilometre usage. At the end of the term the vehicle is simply handed back, avoiding the risks associated with ownership, as there is no residual value to pay.
This option includes 100% financing at a known monthly cost so there’s no capital outlay.
Term purchase transfers the risk of ownership to you, and when the final instalment is received you’ll have full legal ownership. Most finance providers will offer a fixed interest rate for terms between 12 months and 84 months.
You can pay the cost in equal instalments or specify a balloon to suit you or your cash flow preferences. The balloon can generally be refinanced at maturity. And you also have the freedom to pay out the vehicle at any time. Term purchase is the ideal choice if you want to own the vehicle at the end of the repayment term. This option provides 100% financing for the GST-inclusive price of the vehicle at a fixed monthly cost. Both the liability and asset are shown on your balance sheet for taxation purposes.
You can pay the entire amount financed in equal instalments or specify a balloon payment, depending on your cash flow preferences. If you choose a balloon, the amount can generally be refinanced at maturity.
Although payments aren’t tax deductible, depreciation and the interest portion of the loan are usually fully tax deductible. This may be attractive for assets with higher tax depreciation allowances. Excess kilometres do not apply (unless attached to a contract with full maintenance), and either a profit or a loss can be applied to an eventual sale.
All finance providers will require for any fleet finance that all assets either under their ownership or provided as security for the debt be covered under individual or fleet insurance – you can read more about fleet insurance and true total cost of ownership for your fleet here.
True total cost of ownership is also relevant for single vehicle finance and ownership. When determining your new vehicle costs – ensure you factor in all explicit and implicit ongoing expenses so you don’t have any unnecessary cash flow hits to your budget.