Finding the right way to finance a vehicle for your business

When you are starting a business, you need to manage your cashflow as much as possible. If you need a vehicle or vehicles, working out the best way for you to finance them can be a nightmare. Use our flowchart to see what option may be right for you, then check the details in the pdfs below.

If you need any more help, contact our expert!

Image%202018-09-12%20at%203.55.50%20PM.png

Finance Lease

Finance Lease is a popular funding option for commercial vehicles where Contract Hire is not suitable (cars can also be financed)

Finance Lease is a method of financing a vehicle that is usually favoured for commercial vehicles and by VAT registered businesses. The business obtains use of the vehicle by paying a rental each month. The monthly rental is determined by the initial cost of the vehicle (excluding VAT), the period of the Finance Lease and the optional residual value (normally called the balloon payment), plus interest.

Although you never take ownership, at the end of the Finance Lease contract a rental equivalent to the balloon payment (optional) is payable. Usually this means that the vehicle is sold and a proportion of the proceeds of the sale are returned to the lessee. Most Finance Lease companies will offer a number of payment options to suit your cash flow. You can lower the monthly rental with a balloon payment at the end of the contract, or you can pay the entire cost in monthly rentals (normally referred to as a fully amortised Finance Lease), in which case you may be able to extend the Finance Lease with a secondary period rental (sometimes called a peppercorn rental).

Advantages:

• Minimum capital expenditure

• Accurate monthly budgeting

• A fixed interest rate is available on some contracts

• No damage recharge as you are responsible for disposal of the vehicle

• Finance lease is a popular choice for VAT registered companies as they can claim back 50% of the VAT on the finance element for cars and generally 100% for commercials (subject to no private use). On contracts with maintenance the VAT on the service element is 100% recoverable

• Rentals can be offset against the businesses profits. Cars with a CO2 output above 110g/km are currently subject to a 15% disallowance on the amount of the rental that can be claimed against the businesses taxation, for cars with a CO2 output of 110g/km or below, there is currently no disallowance

• Optional maintenance package Disadvantages:

• You will never own the vehicle as you must sell it to a third party at the end of the agreement

• Operating risk associated with running the vehicle

• Interest rates can vary on some contracts

• You must have fully comprehensive vehicle insurance.

Personal Contract Hire

Personal Contract Hire (personal leasing) is simply contract hire but

for private individuals

Personal Contract Hire (PCH) is based on a fixed term contract where customers pay an agreed monthly rental

for the use of a vehicle for a set period. It helps customers wishing to remove the financial risk associated with

the disposal/sale of a vehicle. Contracts are normally taken over two, three or four years, providing a high level

of flexibility.

PCH is very similar to Business Contract Hire, whereby both are based on a fixed annual mileage which is

agreed before the start of the contract. You will need to calculate how many miles you drive each year before a

quote can be obtained. If you do exceed the agreed mileage at the end of your contract you will pay an excess

mileage charge, which will have been agreed upon prior to signing your finance agreement. If you would like to

benefit from fixed motoring costs, then consider adding maintenance and recovery to your contract. Maintenance

covers: scheduled servicing, routine maintenance, tyres, exhausts and batteries etc. It is important that the

vehicle is returned in accordance with the guidelines set out in the ‘Fair Wear and Tear Guide’, a copy of which is

made available to customers at the beginning of their agreement.

Advantages:

  •  Flexible initial rental

  •  Fixed term contract

  •  Flexible term and mileage to suit your requirements

  •  You only pay for the use of the vehicle

  •  At the end of the contract simply hand the vehicle back

  •  Option of including maintenance and recovery with the contract

  •  No depreciation or disposal risk

Disadvantages:

  •  Early termination can be expensive

  •  If you do more miles than stated in your contract you will be charged an excess mileage rate for each mile

over that stated in your contract

  •  You must look after the vehicle and return it in a well maintained condition otherwise you will be charged for

any damage over and above that stated in the ‘Fair Wear and Tear Guide’

  •  You must have fully comprehensive vehicle insurance

  •  You will never own the vehicle, as there is no option to buy it.

Business Contract Hire

A simple and cost effective way to fund any number of vehicles

Contract Hire is sometimes referred to as an Operating Lease. It is a long term rental agreement. Contracts can range from 24 to 60 months and are tailored to the businesses requirements. The Contract Hire Company reclaims the VAT on the original vehicle purchase, which therefore reduces your monthly rentals (which are plus VAT).

Contract Hire is a very popular choice for companies that are VAT registered, as they can claim back 50% of the VAT on the finance element for cars and generally 100% for commercials (subject to no private use, no exempt turnover and not being on the Flat Rate VAT scheme). For contracts including maintenance, the VAT on the service element is 100% recoverable.

One of the major benefits is that there is no disposal risk as the future value is underwritten by the leasing company. Another benefit of Contract Hire is that it is generally ‘off balance sheet funding’ (subject to legislation change) which means it can improve your gearing ratio (assets to borrowing ratio) and therefore possibly your borrowing ability in the future.

Advantages:

• Minimum capital outlay

• Accurate monthly budgetary control

• Improved cash flow

• Rentals can be offset against the businesses profits. Cars with a CO2 output above 110 g/km are currently subject to a 15% disallowance on the amount of the rental that can be claimed against the businesses taxation, for contract-hired cars with a CO2 output of 110 g/km or below, there is currently no disallowance.

• No vehicle disposal or maintenance risks

• Reduced administration

• Road Fund Licence (vehicle excise duty) is included for duration of contract

• Optional maintenance package, breakdown and recovery cover

• Optional replacement vehicle cover in event of a major breakdown

Disadvantages:

• Early termination can be expensive

• If you cover more miles than stated in your contract you will be charged excess mileage costs for each mile over that stated in your contract

• You must look after the vehicle and return it in a well maintained condition, otherwise you will be charged for any damage over and above that stated in the ‘Fair Wear and Tear Guide’

• You must have fully comprehensive vehicle insurance

• You will never own the vehicle as there is no option to buy it.

Lease Purchase

Lease Purchase is for businesses who would like to own a vehicle but do not necessarily have the money to buy one immediately

Lease Purchase is for businesses who would like to own a vehicle but do not necessarily have the money to buy one immediately. It is ideal for non VAT registered customers who eventually wish to take ownership. It is a flexible product and it is possible to put down a larger initial payment, which in turn reduces your monthly payments. The monthly cost is worked out on the difference between the retail value and the depreciation value plus interest.

You are entering into a contract to purchase the vehicle at the end of the contract with Lease Purchase. This contract is only for those who are absolutely sure that they want to take ownership of the vehicle at the end of the contractual period, and pay any balloon payments associated with the contract. Lease Purchase agreements typically run between 24 and 60 months, although the agreement can be settled at any time.

Advantages:

• Low initial payment

• Fixed mileage contract

• Ideal for non-VAT registered customers who want eventual ownership of the vehicle

• Effective budgeting with balloon facility, ownership of the vehicle is acquired once the balloon has been paid

• Monthly payments are not subject to VAT

• The vehicle is a company asset for balance sheet purposes

• Lease Purchase frees up your capital for other business uses

Disadvantages:

• VAT registered companies must pay all of the vehicle purchase VAT up front, in addition to a deposit

• The balloon payment must be paid for at the end of the contract

• The vehicle is yours once you have paid the balloon payment. In some cases the balloon can be higher than its value at the end of the contract

• You must have fully comprehensive vehicle insurance.

Do you have a question about financing vehicles for your business??

Call: 01484 866218 Email: enquire@truefleet.co.uk

John Paul O’Leary T/A trueFleet® is authorised and regulated by the Financial Conduct Authority. trueFleet® is a Credit Broker and not a lender. We can introduce you to a selected panel of Lenders.

BVRLA Membership Number: 7029 | Financial Services Register Number: 685852 | ICO Registration Number: ZA009514.

VAT Registration Number: 166 7512 88 | Registered Office: 50 Whinmoor Drive, Clayton West, Huddersfield, HD8 9QA |

www.truefleet.co.uk | Telephone: 01484 866218 | E & O