Understanding business car loans and vehicle financing

For many businesses, a vehicle is a must-have, whether you’re delivering products or travelling to meet clients. Even if you’re not on the road for work, a business car loan or purchasing a vehicle through your company can be an efficient way to buy or lease your means of transport.

In this article, we outline the range of vehicle finance and business car loans to explore, including purchase and leasing options, how they work and the key considerations for your business. 

Can I finance a car through my business?

Yes, financing a car through your business is a common practice. Your company can choose from several vehicle finance options, including hire purchase agreements, finance leases and contract hires, depending on whether you prefer to own the vehicle at the end of the term or simply lease it. 

Check out the main types of business car loans to consider below.

What are the main types of business car loans?

In the UK, businesses have several options for financing vehicles. The most common types of business car loans and vehicle finance agreements include:

1. Hire purchase (HP): This allows you to spread the cost of the vehicle with fixed monthly payments. You own the car outright at the end of the term.
2. Finance lease: You can lease a vehicle with the option to buy it at the end of the contract. This offers flexibility and often lower monthly payments, with the added benefit that you can reclaim the VAT on these payments. 
3. Contract hire: This is essentially a long-term rental, where you never own the car but benefit from lower costs and fewer liabilities.
4. Sale and leaseback: If your business already owns vehicles, this refinancing option allows you to sell them to a lender and lease them back, freeing up capital for other uses.
5. Small business loans: If you’re unsure about the amount you require or need more flexibility with your capital, a short-term loan for small businesses can help you purchase a vehicle while leaving available cash for various expenses and operational purposes. 

Your plans for the vehicle and how long you intend to use it will determine which of these finance options might suit you best.

What are the interest rates for a business car loan?

Interest rates for business car loans vary based on factors such as the type of financing, the lender’s terms and your business credit history. 

The table below gives you an idea of the interest rates to expect from different business car loans and types of vehicle financing: 

Be aware that when using secured loans for vehicle financing, you’ll generally get lower rates (potentially lower than those shown above, in some cases). This is due to assets being used as collateral against the loan, which lowers lender risks.

However, interest rates offered by lenders in business car loans and vehicle financing agreements are influenced by various factors, such as the type and value of the vehicle, the level of flexibility required, the term length and conditions and your business credit score.

Is it cheaper to lease a car through a business? 

Leasing a car through a business is often cheaper compared to buying, as it requires lower monthly payments. Leasing also provides flexibility, as you can upgrade vehicles more frequently and avoid concerns about depreciation​.

How to get a business car loan

The process of obtaining a business car loan typically involves the following steps:

1. Assess your needs: Determine the type and number of vehicles required, and decide whether ownership or leasing is more advantageous.
2. Check eligibility: Ensure your business meets the lender’s requirements, such as trading history and financial stability.
3. Compare loan options: Use a business car loan calculator to estimate costs and compare different financing options available in the market.
4. Submit an application: Provide necessary documents, like financial statements and details about the vehicles.
5. Loan approval and disbursement: If approved, the funds are disbursed either to you or the seller, and you can proceed with purchasing or leasing the vehicles​.

What do I need to apply for vehicle finance? 

To apply for a business car loan, you’ll need to provide several key documents and information, including the following: 

• Recent financial statements
• Credit history and details of existing debt
• Reasons for funding
• Details about the vehicle/s

Additionally, some lenders may require a business plan or proof of trading history​.

Can I get car finance with bad credit? 

Yes, businesses with bad credit can still obtain car finance, although they may face higher interest rates or need to provide additional security, such as a personal guarantee or a larger deposit​.

The required business credit score to lease a car varies by lender, but generally, a higher credit score increases your chances of approval and securing better terms. Businesses with lower credit scores may still qualify but might face increased interest rates or additional guarantees/security​.

Does a business car lease affect your credit? 

Yes, a business car lease can impact your business credit score, as it is a form of borrowing and often requires a hard credit search, leaving a footprint on your file. However, regular, on-time payments can help improve your credit rating, while missed payments can have a negative effect​.

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What are the tax implications of business car loans?

There are various tax considerations and benefits to using business car loans and asset finance for purchasing and leasing vehicles. However, the extent of benefits and allowances depends on whether cars and vehicles in finance agreements are solely or partly for business use. Also, be aware that interest on business car loans is tax-deductible, 

You can claim capital allowances on vehicles, but the rates depend on emissions. For example, electric vehicles enable businesses to claim 100% first-year allowances. See HMRC’s guidance on business vehicle capital allowances.

However, if vehicle finance is used for providing company cars to employees, there are benefit-in-kind (BiK) considerations. Employees are subject to BiK tax for the use of the car/vehicle beyond simply business activities.

Can a business claim VAT on car finance payments? 

Yes, businesses can typically claim VAT on car finance payments, especially when the vehicle is used solely for business purposes. However, this depends on the type of vehicle and financing agreement. For instance, VAT can often be reclaimed on lease payments but not on purchase payments​.

Is it better to finance or pay cash for a car for business? 

Whether you want to use finance or pay cash for a business vehicle depends on your company’s cash flow and financial strategy. Financing allows you to preserve cash flow for other business needs, while paying cash avoids interest costs but ties up capital that could be used elsewhere​.

What are the benefits of EV financing?

It’s worth strongly considering electric vehicles (EV) when using business car loans and vehicle finance. EV financing offers a few key benefits in the UK, thanks to government EV incentives, such as:

• 100% first-year allowances
• Low BiK rates 
• Tax relief and VAT reclaim on charging
• Reduces emissions, low maintenance costs and ULEZ exemptions
• Plug-in grants for certain types of EV vehicles/uses
• ESG benefits/goals 

As you can see, they make appealing options for both employers and employees in salary sacrifice schemes.

Is business car finance cheaper than personal finance? 

Business car finance can be more cost-effective than personal finance, especially when considering tax benefits and the ability to reclaim VAT. Additionally, businesses often receive better rates and terms due to bulk purchases or fleet agreements​.

Why use a small business loan to finance your car purchase

While business car loans are tailored for vehicle financing, small business loans, like those offered by iwoca, can be a good, flexible alternative. 

A small business loan allows you to use the funds for various purposes, including car purchases, without being tied to specific vehicle finance terms. This can be beneficial if you need flexibility in how you allocate the loan or if you want to finance multiple aspects of your business at once.

An iwoca Flexi-Loan is designed to help small businesses access funds quickly, with fast applications, transparent terms and full control for borrowers. Here is a summary of the key benefits:

• Flexibility – borrow up to £1 million for car purchases, working capital, or other business needs, for a matter of weeks up to 60 months.
• Streamlined applications – iwoca provides quick approval decisions (within 24 hours) with funds often transferred on the same day.
• No asset requirements – unlike secured loans, you won’t need to provide collateral, making it easier if you have limited assets to access funding.
  

Find out how to apply for a flexible business loan from iwoca and use our loan calculator to get an idea of your likely monthly repayments.