BUSINESS FINANCE OPTIONS

To help you choose the right business finance option to suit your vehicle lease or purchase needs,  we provide a summary of the main types of finance available to you below. If you have any questions get in touch.

Business Contract Hire

Business Contract Hire is commonly referred to as vehicle lease and allows businesses a fixed payment method for the use of a vehicle for a term of normally between 12-48 months.

The payments attract VAT of which for cars 50% and for commercial vehicles 100% of the finance element is reclaimable, 100% of the VAT for any maintenance payment is reclaimable. The rental payments are also classed as a true business expense so can be wholly offset against corporation tax.

The benefits are fixed monthly payments with no disposal risk but reasonable care has to be taken of the vehicle and also there is an obligation to remain under the stated mileage at the contract inception or the finance company will levy a charge for loss of value.

Lease Finance

Finance Lease is a popular funding option for commercial vehicles or vans where Contract Hire is not always suitable or the best option.
Your business uses the vehicle while paying a rental rather than a repayment. The monthly rental is determined by the initial cost of the vehicle (excluding VAT), the period of the finance lease and the residual value (the estimated future value of the vehicle at the end of the finance lease period once depreciation is taken into account), plus interest.

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 very popular choice for VAT registered companies and businesses 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 service element VAT is 100% recoverable.
  • Rentals can be offset against the businesses profits.
  • Cars with a CO2 output above 130g/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 130g/km or below, there is currently no disallowance.
  • Reduced administration.
  • On-going advice and support.
  • Optional full maintenance package with breakdown rescue cover.
  • Optional GAP insurance which provides cover for the shortfall between the outstanding finance and the insurance value if the vehicle is declared a write-off by your insurance company.

Disadvantages:

  • You will never own the vehicle as the vehicle must be sold to a third party as the end of the agreement.
  • Operating risk associated with the vehicle.
  • Interest rates can vary on some contract.
  • You must have fully comprehensive vehicle insurance.

 

More Information on Finance Lease:

Although you never take ownership, at the end of the finance lease contract a payment equivalent to the residual value 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 rental (sometimes called a peppercorn rental).

Business Contract Purchase

Contract Purchase (CP) is a type of finance agreement for business customers looking to fund a new vehicle in a manageable way.

The monthly payments are not subject to VAT, however if you do take out the optional service package then you will have to pay VAT on the service costs.

Advantages:

  • Low initial payment.
  • Fixed monthly payments.
  • You may be able to refinance the OFP.
  • No depreciation concerns if you wish to walk away at the end.
  • Maintenance and servicing can be included.
  • Fixed OFP when you first take the contract out.
  • Cost effective

Disadvantages:

  • You will have to make a decision at the end of the contract as to whether you wish to sell the vehicle, return it or keep it.
  • You must have fully comprehensive vehicle insurance.

 

More Information on Business Contract Purchase:

CP is ideal for any business that would like options at the end of its finance agreement. CP customers make an initial payment when they first take out the contract, then pay fixed monthly payments and finally have an Optional Final Payment (OFP) at the end at the end of the contract which is also referred to as the GFV (Guaranteed Future Value).

Lease Purchase

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

Lease Purchase is another type of vehicle finance which is ideal for non VAT registered customers who eventually wish to take ownership

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 in full at the end of the contract
  • Monthly payments are not subject to VAT.
  • The vehicle will become a company asset.
  • Lease Purchase frees up finance for other aspects of your company.
  • The vehicle will appear on your balance sheet and you can record the value against taxable profits.

Disadvantages:

  • 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 the residual value.
  • Dedicated funding product, which does not include maintenance or any other value added services.
  • You must have fully comprehensive vehicle insurance.

 

More Information on Lease Purchase:

It is a flexible product and it is possible to put down a larger initial payment, which has the advantage of reducing the monthly payments. The monthly cost is worked out on the difference between the retail value and the depreciation value plus interest. This means that choosing Lease Purchase for a vehicle which holds its value will work out in your favour.

The main difference between Lease Purchase and Contract Purchase is that instead of having the choice at the end of the contract to purchase the vehicle, which you would have with Contract Purchase, you have already entered 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 attached to the contract.

Lease Purchase agreements typically last between 2 and 4 years although the agreement can be settled at any time throughout the contract.