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Choosing the Best Car Financing Option for Your Startup

By May 14th, 2024No Comments
Car financing options

Are you looking to acquire a company car for your fast-growing startup? 

Getting a company car is a good way to grow your business as this allows you to transport inventory, staff, and supplies from key points much more quickly and conveniently.

That said, buying a company car is also a pretty expensive decision. 

With new cars averaging around $40,000 in Australia (and that’s just for the smaller variants), this can take a large chunk of capital away from your company—money that may be critical for your daily operations.

Fortunately, there are alternative ways for you to finance your car acquisition. You don’t have to save up for the total cost of the car—or even a down payment, as a matter of fact.

You can consider leasing or entering a hire purchase agreement for a car, giving you more flexibility to handle your cash and grow your business effectively.

That said, how do you determine which car financing option is the best for your startup?

This article will give you six tips on choosing the right financing option for you. Let’s look through it.

1. Determine Your Company Budget

Before selecting one of several financing options, it’s important to know your startup’s financial health and budget for the car. 

Does your startup currently have enough funds to cover the cost of car ownership without jeopardizing your operations? If you’re taking out a loan, are you sure that you can manage the monthly repayments moving forward?

The best way to determine if the answer is yes is by looking at your cash flow and balance sheet statements. 

If there’s enough money flowing into your startup, both in the past month and historically, then it can signify that you have a wide range of financing options you can consider. 

Conversely, if you find that your financial resources are limited, then you may need to reconsider your acquisition timeline or consider leasing a car in the short term. 

As tempting as it may feel, don’t try to overstretch your company’s resources for a car unless you have the financial projections to prove that you can manage such an expense in the future.

2. Consider Total Costs, Post-Tax Deductions

Another consideration you have to make when choosing a financing option is the total cost you’re set to incur from the loan. Don’t only look at the principal amount of the loan—also look at the interest rate, insurance, and additional fees that may be stipulated in the loan agreement.

Furthermore, be sure to also verify whether payments made for your car are tax-deductible. 

If it’s solely for business use, it likely is deductible. Calculate this deduction and subtract it from the overall cost of the car loan. If you’re vetting loaning providers, compare this calculated price with the other loaning options.

From there, you can get a quantifiable basis on what loan option can make you spend the least overall. This may not be the best option per se, but it can give you an idea of how low your financial options can be, which can give you a good estimate of what’s a good financial option in the market.

3. Choose Based on Monthly Repayments

While some loans may have relatively low loan amounts, that may be countered by steep monthly repayments. You should try to avoid going to that extreme if you want to keep your business running smoothly in its daily operations.

As mentioned earlier, be sure to check your startup’s budget and ensure that you can make the payments for the monthly repayments and interest rates. 

Straining your budget at the end of each month is bad money management, plain and simple. It can make it hard for you to conduct your operations to the fullest capacity, so be sure to find a deal with ideal monthly repayment terms.

By selecting a loan based on its monthly repayments, you can ensure that operations continue while simultaneously expanding your business functions due to a car acquisition—all while keeping your financial health in good hands. It’s a win-win situation.

4. Consider Alternative Ownership Options

While applying for a loan or buying a company car outright are some of the most popular options for company car ownership, they’re not the only financing methods you can consider.

There are a couple of other ways you can get the full benefits of a car in your fleet while still maintaining a good operating cash flow. Two of these alternative ownership methods include car leasing and hire purchasing.

Car leasing can be a good option if you don’t intend to own the car outright. It comes with low monthly payments and relieves your startup from maintenance costs. Depreciation costs are also not your burden to bear. 

The only catch is that you don’t get full rights to the car, meaning you’ll have to return the car at the end of the leasing agreement.

Another option is to enter a hire purchase agreement with a car owner. 

This agreement also comes with monthly payments, however, they’re usually higher than leasing payments since you’re also paying for the gradual transfer of ownership of the car to your startup at the end of the term. 

Read: CAR LEASE VS HIRE PURCHASE: WHAT’S THE DIFFERENCE?

5. Find The Loan With The Lowest APR 

Another good criteria to consider to minimize the cost of vehicle financing is finding a loan with a lower-than-average APR, or annual percentage rate. Lots of loan providers give different APRs based on your application—so be sure to shop around to increase your options. 

From there, you can pick the loan agreement with the lowest APR, which gives you the perk of not deviating too far from the principal amount and being able to pay in chunks over a period.

In some cases, banks and car manufacturers may provide promotional 0% APR deals to release their stock into the market. This may only be available for people with good credit scores though, so be sure to build that to have this saving opportunity.

You can build your credit by making timely repayments, reporting your monthly credit report accurately, and keeping your credit utilization ratio at less than 30%. 

Do this over a few years and you’ll grow your credit score, ultimately upping your chances on even better car financing deals.

6. Consider Length and Flexibility of Loan Contracts

Another consideration to make when selecting a car financing option is the length of the contract. If you don’t want to be tied to a contract longer than 5 years, then find shorter ones instead. 

A short-term loan agreement is a good option since it’s not likely to change over the course of the loan. This helps you make payment plans in advance a much easier ordeal.

If possible, also try to find options that allow you to defer payments or make early payments without penalties. This added flexibility can help your startup manage cash flow better on a monthly basis depending on the revenue generated per month. 

Finding a lender that is flexible and accommodating with the dynamic nature of startups can be a big help for your financial stability as your business scales. 

That said, if it’s hard to find such a lender, then finding one that at the very least sticks with their stipulated plan the whole way through is also a good option.

Good luck securing your startup car!

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