Liverpool Branch:
Ashcroft Road, Knowsley Ind Est, Kirkby, Liverpool L33 7TW
Warrington Branch:
Owen Street, Warrington, Cheshire, WA2 7PA
E: sales@vehicleman.co.uk W: www.vehicleman.co.uk
Finance
For details of the advantages and disadvantages of the different methods of financing a vehicle, click on any of the links below:
HIRE PURCHASE
What is HP?
Cash is provided by a finance house. Then the repayment is typically an initial deposit followed by equal monthly instalments to repay the cost of vehicle and also the funding cost.
What are the advantages of HP for businesses?
- Payment is done by instalments.
- Writing down allowances apply.
- Interest element allowed against tax.
- A better alternative to a bank overdraft.
- Fixed rate interest used commonly.
What are the disadvantages?
- Once you have entered into this agreement it is hard to escape the payments if you no longer require the vehicle.
- High deposits are generally used.
- This is classed as a debt on your balance sheet which could make it difficult for future borrowing.
- Can be more expensive due to VAT changes.
- Deprecation charges are yours.
Contract Purchase
How does Contract Purchase work?
Purchase risk is eliminated and monthly payments cover depreciation over a set period plus a funding charge, giving similar cash flow benefits to Contract Hire. The difference is Contract Purchase which means at the end of the contract you own the vehicle, the user pays the leasing company a lump sum at the end.
What are the advantages of Contract Purchase?
- You have the tax advantage of out right ownership of the car and also have the benefits of better cash flow and benefits from contract hire.
- Contact can also include a service agreement to include maintenance of the vehicle, accident management and temporary replacement vehicles.
What are the disadvantages?
- VAT is added to all vehicles that are not for 100% for business use.
Summary
Leasing companies will be able to reclaim the input VAT on Contact Hire cars. This significantly increases the area at which Contract Purchase becomes more tax efficient. This can be a useful acquisition method for vehicles that are of high value
Lease Purchase
What is lease purchase?
A lot of small business that do not have the funds for the initial cost of a new car. This is very similar to hire purchase but favours a large pay out at the end of the lease.
What are the advantages of Lease Purchase?
- Has a small initial payment followed by monthly payments and a large payment at the end of the lease.
- Most of a company's cash can then be invested into the business instead of paying a lump sum at the start.
- Ownership of the vehicle at the end of the lease.
What are the disadvantages?
- A business has to have a good amount of cash at the end of the lease in which to pay of the last payment.
- Deprecation values of the products have to be managed well in order to keep a good value of the items.
- Budgeting: it is difficult to provide robust forecasts with this level of risk.
- VAT not recoverable unless item is used for business only.
Summary
Useful for companies with high initial start-up costs or have little or none capitol behind then, as it delays the repayment burden until later.
Finance Lease
How it works?
The main difference from Contract Hire is that Finance Lease rentals are not always dependent on a vehicle life cycle - and hence depreciative value. The lessee may pay back the entire capital cost of the vehicle plus charges over a period of time, or may agree a larger payment to reduce the monthly rental but will never take full ownership of vehicle. This method is particularly useful for fleets with wide variations in operating requirements. Despite the fact the operator never assume ownership, he takes deprecation value risk.
What are the advantages of Finance Lease?
- You have a small up front payment or even chose to have a big payment to get small monthly payments.
- Rentals can be offset against tax.
- Contract can be finished early but early contact termination charge will be added.
What are the disadvantages?
- Vehicles are located on the Balance Sheet.
- Risk of vehicle resale value lies with user.
- No capital allowances for user.
Summary
Leasing companies are able to reclaim the VAT back. Which reduces their capital cost and the amount of funding and repayments required. This makes Finance Lease a more cost efficient alternative to Contract Hire for certain companies
Contract Hire
How it works?
The leasing company calculates the depreciated value for a vehicle at a certain age and mileage, the contract is draw up and charges the user a monthly fee to cover depreciation for the usage of that car and a funding charge is also added. Several extra services are available such as accident management and car maintenance and a funding charge. The user takes no risk in ownership and has predictable monthly costs. The user effectively just pays for the use of the vehicle.
What are the advantages of Contract Hire?
- Little or none initial payment
- Set cost and the most you can lose is use of the car.
- Payments account for the vehicle's future deprecated value, so the user does not have to cover the cost of the car.
- Vehicles are "off balance sheet".
- Perceived inflexibility: because costs are incurred for early termination due to the vehicle's depreciation, condition and excess mileages, but these are similar to any other form of acquisition.
- Not suitable for fleets with unpredictable mileage patterns, although excess mileage pooling can spread the variance.
- Generally no gain from the sale of the vehicle- but no loss will occur either, risk-sharing deals are available for larger amount of vehicles used.
- No penalty charge total flexibility.
- Low funding costs: if cash comes from deposits.
- Writing down allowances: 25% of the cost of the vehicle can be put against tax each year up to a maximum of £3,000 per annum.
- Vehicles are on balance sheet as an asset.
- Cash flow: significant front end costs may divert money away from being invested in the company. There's a minimum opportunity cost - what the money might be expected to earn if invested - of around 8%.
- Depreciative value of the vehicle.
- VAT only recoverable if vehicles are used business use only.
What are the disadvantages?
Summary
The major beneficiary of the August 1995 VAT rule changes. Usage of this type of contract is set to increase mostly bring customers from the popular hire purchase and also Contract Purchase . This is a very convenient way of funding and is also hassle free - especially if you use full maintenance package.
Outright Purchase
Who uses this service?
It is popular with larger companies that have the capital. Also private customers that have a lot of capital behind them.
What are the advantages of Outright Purchase?
What are the disadvantages?
Summary
A lot of the larger companies use this form of buying they usually buying a lot of cars for a cheaper price.
