Guide to Financing Vehicles

• Cash Purchase. Simple and straightforward and you may be able to negotiate a good price. You will also own the vehicle, so you can sell it to recover some of the purchase costs at a later date. If you do buy the vehicle outright, remember that your expenses do not end with the purchase price. Depreciation is a real problem and many vehicles can lose up to 70 percent of their value within three years. You will also need to consider additional charges such as servicing, maintenance and the cost of breakdown or damage. And if you sell, the cash price or trade-in value will depend on the market at the time and cannot be guaranteed.

• Manufacturer sales aid finance. Many dealers offer hire purchase, leasing or contract hire or contract purchase schemes, sometimes at subsidised interest rates; even 0 percent for limited periods on certain models. You make fixed repayments over an agreed term and will eventually own the vehicle when the agreement terminates. However it pays to consider the total costs involved. Could you get the vehicle cheaper elsewhere? Are the monthly payments within your budget? What are the servicing costs? Can you get a replacement vehicle if it needs repairing? What will the resale value be when you want to replace the vehicle and what about disposal? You may find that alternative finance options give you more flexibility and control, at a lower cost.

• Bank borrowing. A business loan can be easy to understand and arrange. You should however think of your longer-term borrowing requirements. Is this facility likely to restrict your ability to borrow for other purposes while the loan is outstanding? To borrow for assets on an overdraft rarely makes sense unless your cash-flow is particularly strong.

• Asset finance. Asset finance can offer many of the benefits of other options and more. For example, with contract hire, the leasing company takes responsibility for the management and maintenance of your vehicles. You will make fixed payments, but unlike hire purchase, you hand the car back at the end of term. Contract hire usually involves lower deposits and lower monthly repayments than loans or hire purchase. You also avoid resale worries the leasing company will calculate the vehicles residual value at the outset and reduce your payments accordingly. If you use the car for business and are VAT-registered you can also reclaim 50 percent of the VAT on the rentals. Rentals are calculated according to your expected mileage and there can be additional charges if this mileage is exceeded. You must also return the car in good condition as charges can be levied if the car has any damage beyond normal wear and tear.

• Off-balance sheet funding ... using contract hire your vehicles do not appear on your company's balance sheet. The removal of capital assets from your balance sheet can enhance your company's gearing (borrowing) ratio.
• Fixed monthly cost ... a fixed monthly payment is charged over the life of the contract and the initial up front payment is normally just three month's rental. Fixed monthly costs for the period of the contract makes budgeting much easier. In turn more accurate budgeting improves your company's cash-flow.
• Reduce vehicle depreciation risks ... with contract hire, you don't have to worry about what your car will be worth when you have finished using it. Your provider can predict what a vehicle is worth and accurately pinpoint its resale value, meaning that only the minimum depreciation will be passed on to you in the monthly payments.
• VAT benefits ... if you purchase the vehicle with cash or a loan you cannot claim the VAT back unless the vehicle is used solely for business purposes. However, if you use contract hire the finance company can claim back the VAT on the purchase price of the new car. That means they pass on these benefits to you. Once the vehicle is on the road, you can then claim back 100 percent of the VAT on the servicing element of the rental cost and 50 percent of the finance rental cost.
• Customised options ... with contract hire you know exactly what payments are made and when, so you can design these to fit the demands of your business.
• Reduced administrative ... you are not involved in the supply, servicing and disposal of your cars so administration is kept to a bare minimum.

• Frees up substantial capital for re-investment
• The lease payments can be offset against taxable profit
• Frees up the time you spend administering your fleet
• Removes depreciation issues
• Boosts your company's liquidity
• Moves your fleet off balance sheet and provides VAT benefits - 50 percent of the lease VAT and 100 percent of the VAT on a maintenance agreement can be reclaimed