By RAM Tracking on 20 Apr 2018
Business owners are often concerned about how decisions will impact their bottom line and key ratios such as Return on Assets (ROA), or Total Liabilities to Assets, to help gain an understanding of how their business is performing at any given point in time. As a business, when taking on long-term assets such as a vehicle fleet, it means that you are taking on a long-term liability, but on the opposite end of the spectrum, you also develop increased assets as a given vehicle may be able to be sold in the future with realised value. The decision to finance a business vehicle becomes focused, as the ability to take on a smaller amount of liability in the short term, but an enhanced potential to realise a greater asset at the end of the road.
Financing a business vehicle, rather than directly purchasing, allows for a business to take on a smaller liability up front. In place of paying the full amount of a vehicle on day one, diminishing cash flows for a business, the business works with a finance company to repay the value of the vehicle, plus interest, over a set period of time. In our current rate environments for both personal and business financing, there are many options available that offer 0 percent interest for initial purchasing with additionally low options carrying forward for the full term of payoff.
If the vehicle is maintained by the business for the full term of the financing and paid off, the liability would be removed, and an asset would be maintained by a vehicle that is no longer held under any financing obligation. Additionally, the flexibility of financing a vehicle over a direct purchase means a vehicle can be transferred or sold before the maturity of the financing. This allows businesses additional flexibility in their management and strategic decision-making when looking to continue to impact the bottom line.
When it comes to many decisions in business, a determining factor can often be directly pointed at the tax implication or potential tax benefit of that decision. Tax treatment for the purchase or financing of a business vehicle should be considered by a business to help understand the full decision being made. In addition to being able to claim interest payments as an allowable company expense, businesses can claim Capital Allowances to help reduce a company’s reported taxable profit.
Vehicles with low CO2 emissions and electric vehicles are commonly available under the Capital Allowance structure, helping to provide an encouragement for businesses to not only finance a vehicle, but to also have a view toward being environmentally friendly. This likely helps to boost a public relations viewpoint for almost any organisation. Additional benefits of the financing of a business vehicle when considering the tax picture would be the running costs of the vehicle, such as insurance maintained, that will be considered a deductible expense for corporate tax.
The flexibility allowed for businesses in strategic decisioning that directly impacts the bottom line, along with potential tax benefits and cost savings measures, help to paint a picture of the benefits to financing a vehicle over the direct purchase when it comes time to add a business vehicle to your organisation.