Finance Products
Most businesses will consider one form of finance or another for the majority of business acquisitions.
The main products available at `Point of Sale` 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 (which will usually include the full VAT) 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
- Customers decide the amount of the deposit (minimum is usually the full VAT amount)
- The customer decides the term of the agreement
- Regular repayments on the borrowed capital (including interests)
- Pay the ‘option to purchase fee’ to own the vehicle at the end of the agreement
- Optional Balloon payment can be included to reduce regular instalments
- No mileage or use restrictions
- No VAT on payments
- Included on the business ‘balance sheet’
- The residual risk is with the customer (including disposal and value)
- Ownership
- Classed as a company asset
- Flexible deposit and term to aid cash flow
- Payments based on the amount borrowed
- Fixed payments – aids cash flow and budgeting
- Early settlement available
- Interest allowable against tax
- Capital Allowances (AIA)
- Can link to service and maintenance plans
Contract Purchase (cp)
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 conditions
- No VAT on payments
- On balance sheet of the customer
- No residual risk with customer
- Can include service and maintenance plans
- Ownership
- Payments are based on a proportion of the vehicle cost which keeps monthly payments lower
- Flexible, low deposits and, potentially, a shorter term
- Classed as a company assets
- Cash flow: lower payment
- The residual risk remains with the financial service provider
- 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
- Rentals are based on ex-VAT price
- Rental payments attract VAT
- VAT can be recovered on rental payments if the business is VAT registered
- Rental payments are based on contracted annual mileage
- Treated as being off the balance sheet for the majority of business customers (not PLCs)
- The vehicle is returned at the contract end
- Mileage, use and condition clauses
- Road Fund Licence (VED) can often be included
- The residual risk remains with the leasing company
- Non-ownership
- Low initial outlay and flexible term periods
- No disposal worries or hassle
- Cash flow: fixed costs over agreed period
- Vehicle returned at contract end
- Budget accurately: fully inclusive costs
- Residual risk remains with the financial service provider
- Early settlement available
- Rentals are an allowable business expense
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 has the effect of reducing the regular rentals; this balloon is part of the contract and is the responsibility of the customer.
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 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, 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 vehicle is in at the end of the contract 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 (usually between 1 and 3 months)
- Decide length of contract
- Decide if a balloon is required to reduce rentals
- Pay regular rentals
- All rentals attract VAT
- No mileage, use and condition requirements
- Vehicle appears on balance sheet
- Residual risk with customer
- End of contract alternatives
- 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
- On balance sheet
- Flexible end of contract alternatives