Finance Products
The majority of business customers will consider one form of finance or another for almost all business acquisitions.
The main products available at ‘Point of Sale’ (POS) can be grouped under ‘ownership’ (Hire Purchase and Contract Purchase) or ‘non-ownership’ (Contract Hire and Finance Lease).
Hire Purchase (HP)
Hire Purchase is a traditional method of purchasing a vehicle over a period of time, with the vehicle acting as security for the loan.
The customer pays a deposit and pays the balance (along with interest and other costs) by regular payments over a fixed term.
Once all the contractual requirements have been made, the ownership will pass to the customer.
The payments will cover:
- The price of the vehicle (less any deposit)
- All associated charges
- An option to purchase fee
summary & benefits
- Decide the amount of deposit (from zero)
- Decide the terms of the agreement
- Pay regular instalments on capital borrowed plus interest
- Pay the ‘option to purchase fee’ to own the vehicle
- No mileage or use restrictions
- No VAT on payments
- On the ‘balance sheet’ of the customer
- The residual risk is with the customer (disposal and value)
- Ownership
- Company Asset
- Car eligible for the appropriate Capital Allowances
- Flexible deposit and term to aid cash flow
- Payment based on amount borrowed
- Fixed payments – aids cash flow and budgeting
- Early settlement available
- Interest allowable against tax
- Can link to service and maintenance plans
Contract Purchase
Contract Purchase is technically a form of Hire Purchase (HP), but a substantial portion of the amount borrowed is left till the end of the contract, similar to a balloon, and commonly referred to as a Guaranteed Minimum Future Value (GMFV).
Traditional HP divides the total borrowed into equal monthly payments. Contract Purchase involves a series of smaller monthly payments, with a larger payment at the end of the agreement (GMFV), which can be paid if final ownership is required.
How it works
The Start of the Agreement
During the Contract Term
The End of the Agreement
summary & benefits
- Payments are based on amount borrowed less Guaranteed Minimum Future Value
- Mileage restrictions and return conditions
- No VAT on payments
- On balance sheet of the customer
- No residual risk with customer
- Can include Service and Maintenance Plans
- Ownership
- Payments based on a proportion of the vehicle cost – this keeps monthly payments lower
- Flexible, low deposit and potentially shorter term
- Company Asset
- Part exchange equity release
- Cash flow: lower payment
- Residual risk remains with the lender
- Eligible for appropriate Capital Allowances
- Early settlement available
Contract Hire
Contract Hire is a very simple funding solution (based on the contractual form of an Operating Lease). It is a long term (usually 2 – 5 year) rental agreement, where the customer only pays for their use of the vehicle. The leasing company is the owner.
The leasing company (lessor) hires the vehicle to the user (lessee) for a fixed period and contracted annual mileage in return for a fixed rental. The lessee must pay the regular rentals, keep within agreed mileage, service and maintain according to manufacturer’s recommendations, insure it and keep it in good condition.
How it works
the start of the agreement
The end of the agreement
For ease of budgeting and cashflow, it is common to build into the rentals some of the operating costs of the vehicle, such as:
- Service and Maintenance
- Road Fund License (Vehicle Excise Duty)
- Tyres
- Roadside Assistance and Recovery
- Accident Management
- Fleet Management
summary & benefits
- Decide how many advance rentals to pay (from one)
- Decide the length of the contract and anticipated mileage
- Pay regular rentals
- All rentals attract VAT
- Mileage, use and condition requirements
- Recorded off the balance sheet for the majority of business customers (not PLCs)
- The residual risk remains with the leasing company
- Non-ownership
- Low initial outlay and flexible periods
- No disposal worries or hassle
- Cash flow: fixed costs over the agreed period
- The vehicle is returned at the contract end
- Budget accurately with fully inclusive costs
- The residual risk remains with the lender
- Early settlement available
- Rentals are an allowable business expense (partial or in full)
Finance lease
Finance Lease is a popular funding solution (especially in the commercial vehicle market). It is a long-term (usually 2 – 5 years) rental agreement, where the customer (lessee) pays for the full cost of the vehicle over a set period, however, the leasing company (lessor) retains ownership. This means that substantially all the risks and rewards of ownership are with the lessee, but they don’t own it!
The lessor hires the vehicle to the lessee for a fixed period (called the `Primary Period`) in return for a fixed rental. A `balloon rental` can be incorporated into the contract which reduces the regular rentals; this balloon is part of the contract and is the customer’s responsibility.
WHY IS IT POPULAR?
The main reasons are VAT, Cashflow and Tax Efficiency.
- The lessor is the owner – so pays the full VAT on the vehicle
- The lessee is renting the vehicle – so pays VAT on the rental (and if VAT registered, can claim all or 50% of this VAT back)
- The rentals can be spread over a number of years and a balloon can be included to keep the rentals lower
- The lessee is allowed to offset the rentals paid each year (partial or in full), or claim depreciation as a business expense
- There are no mileage or condition `excess` clauses – however, the lower the mileage and better the condition, the more it will be worth)
- End of contract alternatives
what happens at the end of the agreement?
Sell the Vehicle
Return the Vehicle
Secondary Rental Period
summary & benefits
- Decide how many advance rentals to pay (from one)
- Decide the length of the contract
- Decide if a balloon is required to reduce rentals
- Pay regular rentals
- All rentals attract VAT
- No mileage, use or condition requirements
- The vehicle appears on the balance sheet
- The residual risk is with customer
- End-of-contract alternatives
- The customer receives a percentage of any net sale proceeds on disposal
- No ownership
- Low initial outlay
- Fixed rentals that attract VAT
- Balloon payment may be available
- Receives a proportion of any net sale proceeds
- Early settlement available
- Rentals are an allowable business expense (partial or in full)
- Appears on the balance sheet
- Flexible end-of-contract alternatives