Business Vehicle Finance Options – the benefits and suitability explained.
In this two-part article we will look at the different personal and business vehicle finance options available. We will put them into simple terms and explain the benefits for each – and the things to be mindful of too.
In today’s article, we will look at the different finance options for business vehicles.
Business Vehicle Finance Options available
When it comes to using cars and vans for your business, there are several options available to you.
Here we look at 5 of the main options and some of the commonly asked questions around these types of finance options.
1. Hire Purchase
What is Hire Purchase?
Normally, Hire Purchase is the first option most businesses go for. It is a cost-effective way of acquiring a new or used vehicle by making agreed instalment payments after making a down payment usually between 10-50%.
Would I own the vehicle?
Yes, but you only take over ownership of the vehicle upon completion of the agreement.
When should Hire Purchase be considered?
Hire Purchase is a great idea if you are looking to keep a vehicle long term or need to make specialist conversions to the vehicle.
What are the main benefits of Hire Purchase Agreements?
· Can be registered in the company name
· It can appear on the balance sheet
· Monthly payments not subject to VAT
· No Mileage Restrictions
When might a Hire Purchase Agreement not be suitable?
Hire Purchase agreements mean you cannot sell or dispose of the vehicle until the payments are completed. You also cannot hand the vehicle back once payments are completed.
What are my obligations in looking after the vehicle?
Although you aren’t returning the vehicle, you need to make sure the vehicle is properly maintained and looked after. This means;
· The vehicle has comprehensive insurance in place at all times.
· The vehicle has to be serviced and maintained in accordance with the manufacturers warranty.
· Failure to make payments could see the vehicles repossessed.
2. Lease Purchase
What is a Lease Purchase Agreement?
A Lease Purchase (LP) is very similar to a Hire Purchase agreement. The only real difference is that there is often a larger final payment (also known as a “Balloon” payment) which can provide lower monthly payments. However you need to be aware that this could give you a negative equity problem at the end of the contract.
Would I own the vehicle?
Yes, but only upon completion of all the payments.
When could a Lease Purchase option be considered?
Again, if you are looking to keep a vehicle for a long time, or wanting to incorporate specialist conversions.
What are the main benefits of Lease Purchase Agreements?
· No mileage restriction
· Fixed monthly payments not subject to VAT
· Vehicle is registered in company name
· Initial payment/ deposit is smaller due to some being deferred until the end of the agreement
What else do I need to consider with Lease Purchase Agreements?
Like with Hire Purchase options, with a Lease Purchase, the vehicle has to be insured and has to be serviced and maintained.
Again, you must keep up with payments, and if any are missed the vehicle could be repossessed.
3. Outright Purchase
What are the benefits of purchasing a vehicle outright?
You could of course by a vehicle outright in full with one payment and there are benefits in doing this as a business.
The main benefit is that your business owns the car and so you can sell it if it is no longer required – recouping some of that initial outlay.
You can also cut out paying interest on the vehicle that you would pay in monthly instalments.
You are also not tied down to mileage restrictions or meeting conditions in the vehicles maintenance – although maintaining and servicing your vehicles is obviously a wise-move.
What are the disadvantages of purchasing a vehicle outright?
The obvious disadvantage is the initial outlay – especially if you need a few vehicles and the unknown value of depreciation.
Then there are the running costs and overall responsibility of the vehicle in terms of maintenance and repairs.
If you are purchasing a vehicle outright, then you need to make sure that it is for a long-term purchase.
(NB on certain cars and with all Light Commercial Vehicles (LCV) when using any type of purchase you can claim capital allowance 100% 1st year allowance. We will be exploring this further in future articles looking financial options and tax.)
4. Finance Lease
What are they?
Finance Lease is a fixed term rental agreement often used for light commercial vehicles (LCVs).
Would I own the vehicle?
No. The vehicle remains the property of the finance company and you have use of the vehicle.
Is there an initial fee?
Yes – followed by monthly instalments and sometimes a larger final payment.
What are the main benefits of Finance Lease?
There are lots of benefits to a Finance Lease option. The main benefits include;
· A low initial outlay and monthly instalments makes it a good option if you need to get multiple vehicles at the same time.
· Optional larger final payment (Balloon Payment) to reduce monthly payments
· Options of 2-5 years
· Potential to share in any resale value of the vehicle
· VAT on the rental is reclaimable 100% if LCV and 50% if Car
What are the disadvantages of Finance Lease?
You are responsible to pay any negative equity that may occur.
What else do I need to consider?
Like the other options, you are responsible for making sure the car is fully insured, maintained and serviced.
If you do not keep up with instalments the vehicle can be repossessed by the finance company.
Something else to consider is something called a peppercorn rental. This is normally a payment which equates to the cost of one monthly payment. Making this payment allows you to keep the vehicle for one more year. After that, you can either pay another peppercorn rental or pay the final balloon rental.
If you have any questions about which financial options would be best for your business, then our experts are on-hand to help you find the best way forward. You can message us using the form below, or feel free to add a comment at the bottom of this page.
In the next part of this article we will look at Personal Contract Hire – and what options are available for personal vehicle use.