Nowadays there is a great range of options available to you if you’re looking to get a company car on business vehicle finance.
We’ll explore the pros and cons, some of the most commonly adopted methods for getting a business car on finance, and the ways in which financing could help you get vehicles for your business.
What is vehicle finance for businesses?
Just like if you were doing it domestically, getting a vehicle on finance allows you to enter into a rental contract so that you can drive a vehicle without paying the full cost of purchasing one.
Whether you’re a sole trader or a limited company, you can get support – whether to rent the cars and vans that you need for the business or simply to allow you to spread the cost of purchasing them over a few monthly installments rather than shouldering a larger outlay all at once.
The benefits of vehicle finance for businesses
The main benefit to financing is that you’re able to access the vehicles your business needs without that upfront expenditure. Financing allows you to spread the vehicle’s cost over its usable life – ensuring monthly payments you can work into your financial planning.
Depending on your situation, you may also be able to take advantage of VAT and tax benefits, repairs, and maintenance.
What you need to know about vehicle financing for businesses
If you choose to finance your vehicles for your business, you will be faced with many different options when it comes to contracts. There will also be a few terms that come up time and time again that are crucial for you to understand so that you can make the choice that’s best for you. We outline both below.
Depreciation
Depreciation is the term that means how much value the vehicle will lose throughout your contract. It’s well-known that new vehicles tend to depreciate quickly, losing more than half of their value in the first few years – indeed, they depreciate as soon as you drive off the forecourt.
Balloon Payment
A balloon payment is where you can buy the car when your contract ends. Depending on your precise agreement and circumstances, there might be a remaining lump sum left to pay so that you can purchase and own the car. This is a balloon payment.
Residual Value
The residual value means the vehicle’s retained value when you reach the end of your contract. Your financing company likely gave an estimate of the residual value of your car at the beginning of your contract period – if so, this will help to calculate your regular repayments, your interest fees, and also any final payments (balloon payment) that may be due.
Different types of vehicle financing for businesses
Hire Purchase
A hire purchase agreement is probably the most common way for businesses to finance their vehicles. Hire purchase only considers the current price the vehicle could retail at, unlike other agreement types – it does not take the residual value (the future resale value) into account. With hire purchase, you would pay the upfront cost in installments.
The price of the vehicle, plus interest, is usually spread across your contracted term, with a small fee, or in some cases a larger balloon fee, added if you wish to buy the vehicle at the end of the contract.
Contract Hire
A contract hire is the most easily understood, straightforward agreement. Functioning like a normal rental, you simply pay every month to use the vehicle. The hire company still owns the vehicle and is responsible for any associated costs such as servicing, breakdown cover, and tax.
A contract hire will come with an agreed mileage and a fee per mile over that agreed amount. There will be no option to purchase the vehicle at the end of your rental.
PRO: because you aren’t involved with vehicle ownership, any depreciation in value will only affect the hire company, not you.
Finance Lease
A finance lease is a little like a rental, but you also take responsibility for the vehicle through servicing and repair. This way, you can benefit from keeping it in good condition.
In a finance lease, the vehicle will often be sold to someone else at the end of your contracted term. If the vehicle is valued at higher than its original estimate – typically because you’ve kept it well, or done a lower mileage – you will profit from the difference. If it is less than the estimate, however, you will foot the bill. Some companies will offer the chance to purchase the vehicle yourself too, paying any remaining sum.
Lease purchase
A lease purchase entails paying for your vehicle in installments throughout your contracted term – but then you’re obliged to buy the vehicle at the end. The repayments will consider the expected resale value at the end of your contract as well as the current price of the vehicle. Lease purchase agreements do not include additional services like maintenance.
PRO: a lease purchase will often have lower monthly repayments than if you opted for a hire purchase agreement.
CON: You will face a larger balloon payment at the end of the contract, and be offered less flexibility than in a contract purchase or lease because you are obliged to buy the vehicle.
Business Contract Purchase
A business contract purchase is similar to a lease purchase, in that you will pay in installments throughout your contract term, and face an already-decided balloon payment at the end of your contract if you decide to purchase the vehicle. But with a business contract purchase, you decide if you’d like to return your vehicle to the company, sell the vehicle, or purchase it at the pre-agreed price.
PRO: business contract purchase deals usually come with maintenance support packages too.
Business loan
A business loan is another, more traditional way to help you buy a new vehicle. You’ll avoid the upfront cost of purchase, and repay in manageable monthly installments. With this method, you’ll be a cash buyer – so the vehicle will immediately be yours. You then have more control, so you can sell the vehicle on if you wish to.
Interested in finding out more about financing a vehicle? Get in touch with Kane Financial Services today, open 08.00 – 17.00 Monday to Friday.