How to Buy a Car Under Your Business Name
So, you've successfully established your business and are now planning to buy a car or two to support your business operations? A car for business is always a necessity. It helps you transport products and services more promptly and securely. It also provides convenience for you and your field staff, helping you utilize time and energy more effectively.
If you want to take out a car loan to finance your purchase, you can either use your personal credit to borrow money for your business or your business credit. However, the latter is more advantageous because it helps build your business' creditworthiness and deduct your vehicle sales tax.
To increase your chance of successfully financing a car under your business name, follow these steps:
1. Build and maintain a good business credit profile.
The only way to successfully take out a car loan under a business name is to present a good business credit, along with a stable source of income and a substantial down payment.
1. To establish your business profile, make sure to have an Australian Business Number and register your business properly via the Australian Government's Business Registration Service. Incorporate your business or form an LLC to make it legally separate from you as the owner.
2. Use a business phone number. It doesn't matter if it is a landline, cell phone or VoIP but make sure that you have a separate number for your business and in your business’ legal name.
3. Do not also forget to register for the correct taxes to avoid any potential legal implications. Depending on the type of business you have, the taxes you must register may include:
- Goods and Services Tax (GST), if your business has a turnover of $75,000 AUD or higher
- Pay as You Go (PAYG) withholding tax, if you need to withhold an amount for tax purposes like paying wages or salaries
- Fringe Benefits Tax (FBT), if you provide perks like a company car to your employees
4. Then, open a business checking account in your legal business name. Use this account to pay for the financial transactions of your company.
5. Use an exclusive credit card for your business purchases and be sure to pay the credit card bill from your business checking account. Make sure your business credit card provider reports to the credit reporting agencies.
6. Once your business identity is established, open a business credit file with all three business reporting agencies in Australia: Experian, Equifax and illion.
7. Establish your line of credit with at least five vendors and/or suppliers to create credit for your company to use when purchasing with them. Then, ask them to report your payment history to the credit reporting agencies.
8. Do not forget to pay your credit and bills on time. The more you do this, the more your credit score improves. Late payments, on the other hand, have a tremendous negative impact on your credit rating. While good payment history suggest lending institutions that you are a responsible borrower, a record of late payments tells otherwise.
2. Figure out the best financing option.
You should look around at loan rates to find out which one is going to be the best for your business. You can often get these through the dealership, but you could find a better rate somewhere else.
Let’s say you’ve decided to buy a new car instead of using one that’s already available. You must understand that you have many different options when it comes to purchasing and financing.
You can buy a new vehicle outright from any given dealership. It is worth it to consult with the dealership and figure out which vehicles may be eligible for special tax breaks and which are not.
You can also buy a used vehicle. This is a popular option because it saves money while offering a similar level of performance. And the money you save could go towards other elements of your business, which is especially important for a startup.
Finally, there’s the most popular way of getting a business vehicle: leasing one. Lease payments are effectively operating expenses, meaning you get to start deducting right away. And one of the only real downsides of leasing, the limited mileage, maybe a non-issue for many businesses who do not travel far from home base.
3. Visit a dealership that sells cars to companies.
Because dealing with a business is different than with an individual, make sure you find a dealership that can support your needs.
Dealerships typically offer discount prices to any buyer that's purchasing a fleet. If you plan to take out several vehicles for business, check out dealerships that are offering this discount.
4. Pick out your car.
Determine what type of car your business needs. If your business is transporting lots of large items, then you are not going to want a coupe. If you only need the car for transportation, then you probably won’t need a massive gas guzzler. Fitting the car to your needs will save you money and be more efficient overall.
When choosing a car for business, there are hundreds of options available. Cars come in all shapes and sizes—and at many price points. You can go with a large delivery van like the Ford Transit, attract attention with something like the new Kia Soul, or go the more economical route with a staid (but wholly reliable) compact car.
Thilo Koslowski, an auto analyst with Gartner, argues that any vehicle for business should be treated as an asset that’s no different from the water cooler in your break room. It’s important to add up the cost of fuel, insurance, and even consider intangibles like resale value.
5. Finance the vehicle.
With the car in mind, provide all the information that the seller requests. You may want to contact the dealer ahead of time so you can make you bring any special documents. This will make the process go a lot more smoothly. If it turns out that your business credit score is not good enough or there is some other insurmountable obstacle preventing you from buying the car, you can always lease it.
Buying with a commercial car loan can give your business a definite advantage. Car loans for business have a lot of advantages over consumer loans. The two major products for business car finance are chattel mortgages and hire purchases. Chattel mortgages give you ownership as soon as you buy, while the bank or lender retains ownership in a hire purchase agreement.
Chattel mortgages allow businesses the flexibility of tailoring their loan to fit their cash-flow and business requirements. In many cases, a business can make a cash-flow neutral purchase, financing 100% of the car’s value while amortising extras such as insurance and registration costs. Businesses can claim the GST on their BAS, interest payments and depreciation. They can also claim the fuel input tax credit.
6. Complete the required paperwork.
There are a few important items to keep in mind both before and after the purchase in terms of paperwork. First, make sure you have insurance on the vehicle. You don’t want to leave the dealership without it. Secondly, have the car registered and be aware of any DMV regulations for company-owned vehicles in your state. This will keep you within the confines of the law and it will protect you financially.
Buying a car under a business name does not differ substantially from an individual car purchase. By maintaining good credit and following the rules in your state, you’ll be on the road in no time and on your way to growing your business and meeting its needs.
Once you have possession of the vehicle, you can proceed to register the car in your business name.
Claiming the GST on Your Business Car
If the car is used exclusively for the business you can claim a GST credit on the price of the car, assuming you have a tax invoice. You can also claim a GST credit on lease payments and any costs associated with running the car.
If the car is also used privately you will need to keep a logbook for 12 weeks as outlined above and will only be able to claim the business-use percentage of the GST paid for the car and car-related expenses.
Before you rush out and buy yourself a Ferrari, be aware that the ATO has a car limit of $57,581. With a few exceptions, you will only be able to claim a GST credit up to one-eleventh of this limit.
Your business will be able to depreciate the business-use percentage of the value of the car.
It is really important to remember that if you are classified as a small business by the ATO then you will be able to immediately claim the entire purchase price of a vehicle costing less than $20,000 including GST. A good incentive not to buy more cars than you need!