Finance products: A complete leasing guide

Here, we look at the various financial products you have at your disposal when it comes to financing your fleet.

Now that you’ve established your business it’s time to start thinking about how you’re going to grow and flourish. This means that you’re likely to need vehicles, whether it’s company cars for your sales force, a director’s new toy or vans for labourers your vehicles are always going to be the drivers of your business.

With the potential of a small fleet to manage you seriously have to consider all of your options when it comes to all of the various financial products you have at your disposal. If you make the wrong choice it’s likely to cost you a small fortune in the best case and at worst could put your whole business at risk. You could look to take the responsibility away from the business by encouraging all of your staff to obtain their cars through personal car leasing and pay them a company car allowance into their salaries. This does limit the liability for the company however it comes with a whole host of issues to consider. How would you deal with a top-notch salesman that had poor credit and couldn’t secure his own lease? That’s not to mention some employees might not be comfortable taking on that burden on behalf of their employer. With all of this in mind you’d likely look to take the vehicles out in the company name so here’re the most popular and sensible options.

Business contract hire

This one is as simple as it sounds. This is the agreement you make to keep a vehicle for a certain period of time (usually between 18 and 60 months) for a specific number of miles over the duration of the contract. Having a rental of £100 over 36 months means that the maximum you would spend on that vehicle over that term is £3,600. You know this right from the beginning and you can budget for that over the duration of the contract. It’s completely fixed cost and will likely include the road fund license for the duration of the lease. This means the liability for the vehicle lies with the company funding your lease.

If the value of the vehicle you’re driving plummets drastically and it’s worth way less at the end of the three years then you’re completely covered. It’s their problem and not yours. Business contract hire is extremely suitable for small businesses that don’t have the advantage of huge cash reserves, however, there are some down sides. Usually you will be fixed into the vehicle for the complete duration you signed up for. All of the rates are put together based on CAP data, current interest rates and taxes. This means the funders know how much they want to make from the finance and what they want from the sale of the vehicle at the end which then in turn, makes a lease inflexible. If you wanted to terminate a contract half way through you’re likely to be asked to pay 50 per cent of the remaining balance of the contract which is a steep price to pay if you have a vehicle you no longer need.

Finance lease

Finance lease is another option you have, this option is rather more flexible than contract hire which is all well and good, however, it isn’t as concrete which means there’s a risk involved. This type of contract leaves the leasee responsible for the disposal of the vehicle at the end of the period. During the quoting stage of a finance lease you will be presented with figures much the same as traditional contract hire in that there will be an initial payment and monthly rentals. You will also be given a balloon payment. This all sounds good when you think ‘well I could buy the thing for the same monthly cost as leasing it’ but it’s not quite as simple as that. If your balloon for that vehicle is £10,000+VAT after 60 months and 50,000 miles you will be obligated to pay that regardless of the actual value of the vehicle at the time. If your car is worth £7,000+VAT then you’re going to have to find that extra £3,000 just to not have a car anymore, which can leave a sting in the wallet.

Risk in mind, however, and the finance lease if a great product for a whole host of reasons. Brands like Porsche for example – they don’t depreciate anywhere near as much as a straight forward lease costs. This is because their value and style of car means they’re high risk for a bank to have a whole fleet of, so to make sure they don’t have too many the rates are increased to mitigate the risk. All of this is fantastic for the business owner who’s looking for a new Porsche. If you have payments of £1,000 and a balloon of £35,000 on a 911 which is worth £65,000 you’ll be laughing all of the way to the bank. Also, providing the vehicle is worth what you owe on it you should also be able to terminate the contract at any point which is convenient if you need to regularly change vehicles or the circumstances of your business changes.

Flexible lease

Flexible lease, as you might guess from the name this is the most flexible option of the lot. With this option you have significantly higher rentals and you have complete responsibility for the disposal of the vehicle, however, at the end of the contract you will own the vehicle completely having paid minuscule interest rates and there’s pretty much always guaranteed equity in the vehicle so you can sell it at any time and not have any unexpected shortfalls. You also don’t need to worry about the cost of excess mileage fines as the mileage is simply tied to the value of the vehicle and the value decreases accordingly. Although given the drastic difference between the rentals on a contract hire product and flexible lease this option will only really be feasible if you’re a fairly well-established business with a decent amount of cash.

Now that we’ve been through the three various contract options it’s probably worth pointing out that they all come with the exact same tax advantages and subsequent pit falls. They have the exact same impact on your balance sheet meaning there are savings in corporation tax to be made, however, vehicles on all of these various contracts still attract benefit in kind tax at the same rates. The best way to make a decision on which product you should run with is to look at the type of vehicle you’re looking to take on. If it’s something that’s high value and typically retains over 50 per cent of its value after three years and 30,000 miles than you’d be daft not to put it on flexible or finance lease, however, if its anything less exciting business contract hire is always the best way to go. You don’t have to worry about disposal or liability which frees up your time to make sure the rest of your business runs smoothly.

Ben Lobel

Ben Lobel

Ben Lobel was the editor of from 2010 to 2018. He specialises in writing for start-up and scale-up companies in the areas of finance, marketing and HR.

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Fleet Management

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