In business, the cardinal rule is always making more than what you spend. Sometimes the thorny issue in business, especially when you’re growing is whether to lease or buy outright. There are many differences between the two and one method may have more advantages than you otherwise thought. So, what’s the right decision for your business? Buy a car? Or lease a car?
When buying a car for business makes sense
Buying a car means you are buying a long-term asset for your company, much like property or equipment such as a computer; anything a business needs to make money. If you need the car for primary business operations, this is a “performing” asset, something that helps earn revenue. Car loans for business comes in two variants: a chattel mortgage and a hire purchase.
A chattel mortgage is much like a consumer car loan: a business takes ownership of the car (chattel) and pays off the loan (mortgage) over a set term. A hire purchase gives a business use of the car without it being on the books as their own.
Either way, ABN holders that use a car for 50% or more of business can take advantage of tax benefits.
Businesses can claim the GST on the purchase price, depreciation and interest paid on repayments. If you opt for a balloon (residual value) payment, you can also claim the GST on that.
You can also write off fuel, distance travelled, and maintenance up to certain limits. As of 2019, you can instantly write off $30,000 under the instant asset write-off scheme for small-medium business.
The benefits and disadvantages of leasing a car
Leasing a car for business purposes is an attractive option due to costs and cash flow. You usually won’t have to come up with a down payment or collateral to purchase; also, monthly lease payments are lower than car payments.
Another upside is once you’ve finished the lease period, you can trade in the car for a new lease meaning you’ll always have the latest and greatest models. You won’t have to finance a depreciating asset, which ends up costing more over time, relative to the value of the vehicle.
Sometimes leases cover maintenance which further saves money. However, you cannot alter the car in any way, it must be handed back in as good as condition as possible, and insurance premiums may be higher than buying.
Over the very long term, leasing can end up costing more without having any assets to show for it.
Things to consider
You need to conduct a cost-benefit analysis such as the total cost over the car’s lease or loan term. This could be monthly repayments, how many kilometres you’re likely to travel, maintenance and fuel costs, and the residual value at the end of the day. As always, you should consult a financial professional before making a major business purchase.
About the Author
Bill Tsouvalas is the founder and CEO of Savvy, one of Australia's leading financial institutions. Established in 2010, Bill turned Savvy into one of BRW's fastest growing companies in 2015. He frequently shares his knowledge and ideas on finance, mortgage, money, and investment in the media.