Choosing the right finance for your fleet
Funding your fleet is an important decision that can have a huge impact on the time you devote to running your business and managing your outgoings.
Choosing the right finance option
With a growing number of vehicles now purchased via some form of finance package rather than outright purchase, business owners now face a minefield of finance options that could see them paying more if they make the wrong decision.
Today’s variety of finance agreements have been developed to suit changing customers’ requirements, offering greater flexibility on outright purchase options or providing cost effective lease and contract hire alternatives.
To lease or to buy?
Ask yourself whether you want to own the vehicle at the end of your agreement. You also need to consider how you want to pay for it and what is your budget.
Your decision will ultimately depend on where you are as a business and what you need from the vehicle. If you’re just looking short-term, you are unlikely to want to buy the vehicle. But what is the impact on your cash flow, are there any potential tax implications...?
Buying your vehicle
Paying cash can appear to be the most straightforward way to purchase, with no interest to pay. However, paying the full amount up front could mean delving into the company savings or tying up cash that could be working for you or earning money, so businesses must do their sums first.
Personal Loans remain popular amongst those preferring to own their vehicle from the outset and keeping it longer than two or three years. However, it can prove to be expensive and, depending on your whether you have a secured or unsecured loan, you’re vehicle will be at risk if you default on payments.
Hire Purchase involves credit secured against the vehicle and usually involves a minimum deposit of one month’s payment. The balance is then divided into fixed monthly payments that meet your desired monthly budget, with terms ranging between 12 to 60 months. There is no mileage limit set on the vehicle, but the finance company owns it until the final payment and option to purchase fee are paid.
Lease Purchase is a great option for small businesses wanting to keep control of their cash flow. It offers lower monthly payments by deferring a balloon payment to the end of the agreement. Customers have a choice on the length of their agreement, with terms usually running between 12 and 49 months with a maximum mileage of 200,000 at contract end. It supports long-term rental and there is ownership at the end.
Personal Contract Plan (PCP) is somewhere between a lease deal and buying outright. It offers buyers a flexible and affordable route to purchase a new vehicle, and keeps all of their options open, with terms between 18 and 42 months.
An agreed future value of the vehicle, flexible annual mileage limits and variable deposit amounts enables customers to reduce monthly repayments.
At the end of the agreement, the buyer has three options: 1. Keep the vehicle and pay off the optional final payment and option to purchase fee to own the vehicle; 2. Exchange the vehicle for a new one; 3. Return it.
Leasing your vehicle(s)
For businesses running more than one vehicle, it often makes more financial sense in the long run to opt for lower cost options such as Contract Hire and Finance Lease.
Contract Hire can offer greater flexibility to businesses as well as reduce any worries about the future value of the vehicle or the hassle of eventually selling it. Ranging from 12 to 60 months, Contract Hire agreements offer fixed monthly payments with the option to include a servicing and maintenance package. At the end of the contract, you simply hand the vehicle back, subject to mileage and vehicle condition, and businesses have the option to start a new agreement or walk away.
It frees up capital that can be used elsewhere in the business, as monthly repayments are usually lower than a loan. Repayments could be offset against tax where a proportion of rentals may be claimed as an expense against taxable profits.
However, there is an annual mileage agreement. If you exceed the agreed mileage, charges will apply. You are also required to hand back the vehicle in a reasonable condition.
Leasing a vehicle has similar benefits to Contract Hire; however there will be no option to buy the vehicle at the end of the term.
Finance Lease is a flexible form of funding company vehicles, allowing firms to change the size of the deposit, length of agreement and monthly rental costs. Businesses can choose between paying off the entire cost of a vehicle via monthly rentals over the term of a lease or paying fixed monthly rentals plus a final payment based on the forecast resale value of the vehicle. Agreements usually range between 12 to 48 months and have a maximum mileage limit of 150,000.
At the end of the contract, the customer sells the vehicle to a third party. Under a Finance Lease agreement, the business could be entitled to the proceeds if the amount is greater than the remaining balloon payment or agreed vehicle value.
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Things to consider:
Mileage restrictions - one of the main elements that will affect the resale price of the vehicle and is key to calculating your monthly payments. Charges if you go over can be significant.
Vehicle condition - the vehicle will be inspected for damage at the end of the contract and anything classed as ‘excessive wear and tear’ may mean you’ll need to foot the bill for repairs.
Servicing and Maintenan ce - many contracts now include servicing and maintenance, but if you’re organising it yourself check for some restrictions on where you can have the work done. Also make sure you get the vehicle serviced on time as stated by the manufacturer.