New Year is a great time for a fresh start. Perhaps you’re thinking of a new van for your business. But choosing the right van is only half the job: you’ve also got to decide how to pay for it. And with a multitude of finance options available, business owners face a minefield of possibilities that could see them paying more than they need to if they make the wrong decision. With this in mind, My Fleet Toolbox presents a simple guide to help companies choose the right finance package to suit their business needs.
What’s available: lease or buy?
The first thing you need to ask is whether you want to own the vehicle at the end of your agreement. The second question is, how do you want to pay for it, and what is your budget?
There are advantages and disadvantages to buying or leasing, and your ultimate decision will depend on where you are as a business and what you need from the vehicle.
Amongst the questions you’ll need to answer how long do you want to use the vehicle for – for a short term use then you are unlikely to want to buy the vehicle, 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 a new vehicle, and with no interest to pay on loans, it can look like the cheapest. However, paying the full amount upfront could mean delving into the company savings or tying up cash that could be working for you or earning you money, so businesses must do their sums before committing to paying cash.
Personal Loans remain popular among vehicle buyers 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, it may be that it’s more than you’re your van that’s at risk if you default on payments.
Hire Purchase involves credit secured against the van and usually requires a minimum deposit of one month’s payment. The balance is then divided into a series of fixed monthly payments that meet your desired monthly budget, with terms ranging between 12 to 60 months. Another benefit of Hire Purchase is that there is no mileage limit set on the vehicle. You are the registered keeper, but the finance company owns it until the final payment and option to purchase fee are paid.
Lease-Purchase is an excellent option for small businesses wanting to keep control of their cash flow. For customers looking to reduce monthly payments but still own the vehicle at the end of the finance agreement, Lease Purchase is a great option. Lease-Purchase offers lower monthly payments than Hire Purchase by deferring a balloon payment to the end of the agreement.
Lease-Purchase 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. One of the key benefits is the need that the product can support long term rentals, and there is ownership in the end.
Personal Contract Plan (PCP) somewhere between a lease deal and buying outright, PCP offers buyers a flexible and affordable route to purchase a new vehicle and is one of the most popular forms of finance available. PCP gives customers a safe and secure way to get behind the wheel and keep all of their options open, with terms between 18 and 42 months.
Agreed future value of the vehicle, flexible annual mileage limits and variable deposit amounts enables customers to reduce monthly repayments. Monthly repayments tend to be smaller because agreements typically require a large balloon payment at the end of the agreement to take full ownership of the vehicle. However, at the end of the contract, 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 (subject to application and acceptance); 3. Return it (as long as it is in good condition, it can be given back).
Leasing your vehicles
For businesses running more than one van, 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. The agreement can range 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 three contracts you hand the vehicle back, subject to mileage and vehicle condition, and businesses have the option to start a new agreement or walk away.
Contract Hire also frees up capital that can be used elsewhere in the business as monthly repayments are usually lower than taking out a vehicle loan. Repayments could be offset against tax where a proportion of rentals may be claimable as an expense against taxable profits, so you could still receive similar deductions as if you bought the van outright. Depending on the agreement, you will be able to replace the contract with a new deal, or walk away at the end of the contract.
However, customers need to bear in mind that with Contract Hire, you have an annual mileage agreement, if you exceed the agreed mileage, excess mileage charges will apply. You are also required to hand back the van in a reasonable condition as you may be charged for any damage that goes beyond fair wear and tear.
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. Smaller companies or sole traders may not be able to take up this option as they are usually only offered to VAT-registered businesses and therefore may be more suited to Contract Hire. Monthly repayments can also be difficult to budget as interest rates can vary over the lifespan of the agreement.
Finance Lease is a flexible form of funding company vehicles allowing firms to change the size of the deposit, length of the 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 (generally referred to as a balloon payment) based on the forecast resale value of the vehicle. Opting for the balloon payment method can help lower the monthly payments as the business is only paying for the anticipated depreciation of a vehicle. Agreements usually range between 12 to 48 months and have a maximum mileage limit of 150,000 at contract end.
At the end of the contract, the vehicle is sold by the customer to a third party. Under a Finance Lease agreement, the business could be entitled to the proceeds if the amount is higher than the remaining balloon payment or agreed vehicle value. The flexibility of this type of leases lies in the balloon payment. A business that wants to lower its monthly repayment rentals can sign up to a higher balloon payment (an option not available to Contract Hire customers). This option means a Finance Lease can represent a way to fund a new vehicle with both low upfront and ongoing costs. However, customers will be responsible for making up any shortfall between the vehicle’s actual residual value and the balloon payment, and there is no option to own the vehicle.
Sound advice from Fleet Toolbox
To make the most informed decision about how to run your van fleet and to help manage all these factors, Fuel Card Services has Fleet Toolbox. Offering four terrific services designed to boost your fleet cost-efficiency, meet your legal compliance and your duty of care responsibilities.
Our fuel card customers can enjoy all of these services free for three months, then continue for a small monthly charge of £5.