Vehicle Funding

Company vehicles are an essential tool for most businesses; they can be expensive to own and operate so it is important to select the most appropriate vehicle funding method for your situation. Each of these methods have various features and benefits depending on an organisation’s operational objectives, accounting and cash flow requirements.

WestWon Fleet can offer various forms of vehicle funding; we will consider any request from our clients and will look to advise and assist you. Below are explanations of the three most popular forms of vehicle funding:

Contract hire

Contract hire

This is the most popular type of vehicle funding with approximately 60% of businesses choosing this method. Contract Hire provides a car to a lessee or user for a set period of time and a pre-determined mileage, in return for a fixed monthly rental. There is no option to purchase the vehicle and it must be returned at the end of the vehicle funding contract to the leasing company.

The monthly charge for a contract hire vehicle is broken down into two parts; one part is called the ‘finance’ rental and the other the ‘service’ rental.

The ‘finance’ rental will take into account the cost of the car, road tax, its period of use, agreed mileage and forecast residual value (the estimated price for the vehicle at the end of the contract). Vehicle mileage will have a great impact on the finance rental as the total mileage has major implications for the residual value.

Understating the mileage will reduce the monthly rental, however this may result in excess charges at the end of contract if the contracted mileage is exceeded. The choice of make and model of vehicle can have a big influence on the rental also. Two cars can have identical list prices, however one may have a much higher forecasted residual value so this will be reflected in a lower monthly rental.

The ‘service’ rental covers a range of additional services that the lessee can specify to their requirements

Pros

  • Fixed Cost-Motoring
  • Frees up capital
  • Off balance sheet
  • Steady cash flow
  • 100% of VAT reclaimable where vehicle only used for business (pool vehicle)
  • 100% of the maintenance is reclaimable
  • Rentals are usually Corporate Tax deductible
  • Additional line of finance that may not affect banking arrangements
  • Reduces issues of vehicle ownership

Cons

  • Mileage and Term need to be correct at the outset of the contract, otherwise charges may apply
  • No option for vehicle ownership
Finance lease

Finance lease

Similar to contract hire, a finance lease allows the lessee to hire a vehicle for a fixed monthly fee. One of the main differences is that the risks and rewards of ownership of the vehicle are transferred to the lessee.

A finance leased vehicle will show on the lessee’s balance sheet; outstanding rentals will be represented as a liability. Generally, a finance lease will follow one of two standard formats – the residual value lease or the fully amortised lease.

Residual Value Lease – the declining value of the vehicle is exhibited in the monthly rental, with a final balloon payment covering the estimated residual value at the end of the finance period. The lessee acts as a sales agent for the leasing company and sells the vehicle. If the sold price is above the pre-determined balloon payment, then the leasing company will generally refund a percentage of the proceeds to the lessee. If the sold price is below the balloon payment, then the lessee will be liable to pay the shortfall to the leasing company.

Fully amortised lease – the full value of the vehicle is taken into account and there is no balloon rental to consider at the end of the term. The lessee can still sell the vehicle and take a percentage of the proceeds of the sale as above.

When the end of the primary lease period is reached, the customer can request to lease the vehicle for a secondary period at a nominal ‘peppercorn’ rental. If the finance lease is a residual value lease, the lessee must pay the balloon payment before entering the secondary rental period. With the fully amortised lease, the lessee can enter into the secondary rental period immediately.

Some finance companies will provide maintained finance lease contracts, of which the lessee will be able to reclaim 100% of the VAT.

Pros

  • Fixed monthly rentals
  • 50% of VAT can be reclaimed on the finance element
  • Rentals are usually Corporation Tax deductible
  • Potential to carry on using the vehicle at the end of the primary lease period
  • Additional line of finance that may not affect core banking arrangements
  • Car appears as an asset on company books

Cons

  • Risk of fluctuations in the used car market
  • Monthly rentals appear as a liability on balance sheet
Lease purchase

Lease purchase

This is a method for acquiring ownership of a vehicle, it can be referred to as lease purchase (LP) or hire purchase (HP).

With these agreements, the purchaser hires the vehicle from a finance company with an option to purchase it at the end of the hire term. The agreement generally requires a deposit anywhere from three month’s rentals up to 20% of the capital cost of the vehicle and will usually terminate with a balloon payment – normally equivalent to the forecasted residual value of the car. By increasing or reducing the deposit and balloon payments, the monthly repayment amount can be varied to suit the purchaser’s budget. There is an option to purchase fee at the end of the term that can vary greatly between finance companies.

This method of finance will be attractive to businesses that wish to retain ownership of their vehicles, want to avoid mileage restrictions and do not want to use their capital or overdraft to pay for them. This funding method presents a residual value risk and requires in-house expertise and management to write the value of the vehicle down monthly on the balance sheet. The interest rate on a hire purchase agreement can be fixed and therefore create fixed monthly instalments, eliminating exposure to fluctuating interest rates.

Pros

  • Purchase cost may be Corporation Tax deductible thorough capital allowances
  • Interest elements of monthly payments may be Corporate Tax deductible
  • Can benefit from higher residual values

Cons

  • At risk from lower residual values
  • Outstanding instalments appear as a liability on the balance sheet
  • Not VAT efficient
  • Vehicle appears on balance sheet
  • Cost of in-house management
WestWon Fleet Limited are a credit broker and not a lender. Registered in England & Wales with company number : 09048672
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