When you are starting a business, you need to manage your cashflow as much as possible. If you need a vehicle or vehicles, working out the best way for you to finance them can be a nightmare.
Finance Lease is a popular funding option for commercial vehicles where Contract Hire is not suitable (cars can also be financed)
Finance Lease is a method of financing a vehicle that is usually favoured for commercial vehicles and by VAT registered businesses. The business obtains use of the vehicle by paying a rental each month. The monthly rental is determined by the initial cost of the vehicle (excluding VAT), the period of the Finance Lease and the optional residual value (normally called the balloon payment), plus interest.
Although you never take ownership, at the end of the Finance Lease contract a rental equivalent to the balloon payment (optional) is payable. Usually this means that the vehicle is sold and a proportion of the proceeds of the sale are returned to the lessee. Most Finance Lease companies will offer a number of payment options to suit your cash flow. You can lower the monthly rental with a balloon payment at the end of the contract, or you can pay the entire cost in monthly rentals (normally referred to as a fully amortised Finance Lease), in which case you may be able to extend the Finance Lease with a secondary period rental (sometimes called a peppercorn rental).
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Personal Contract Hire (personal leasing) is simply contract hire but
for private individuals. Personal Contract Hire (PCH) is based on a fixed term contract where customers pay an agreed monthly rental for the use of a vehicle for a set period. It helps customers wishing to remove the financial risk associated with
the disposal/sale of a vehicle. Contracts are normally taken over two, three or four years, providing a high level of flexibility.
PCH is very similar to Business Contract Hire, whereby both are based on a fixed annual mileage which is agreed before the start of the contract. You will need to calculate how many miles you drive each year before a quote can be obtained. If you do exceed the agreed mileage at the end of your contract you will pay an excess
mileage charge, which will have been agreed upon prior to signing your finance agreement. If you would like to benefit from fixed motoring costs, then consider adding maintenance and recovery to your contract. Maintenance covers: scheduled servicing, routine maintenance, tyres, exhausts and batteries etc. It is important that the vehicle is returned in accordance with the guidelines set out in the ‘Fair Wear and Tear Guide’, a copy of which is made available to customers at the beginning of their agreement.
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A simple and cost-effective way to fund any number of vehicles, Contract Hire is sometimes referred to as an Operating Lease. It is a long-term rental agreement. Contracts can range from 24 to 60 months and are tailored to the business requirements. The Contract Hire Company reclaims the VAT on the original vehicle purchase, which therefore reduces your monthly rentals (which are plus VAT).
Contract Hire is a very popular choice for companies that are VAT registered, as they can claim back 50% of the VAT on the finance element for cars and generally 100% for commercials (subject to no private use, no exempt turnover and not being on the Flat Rate VAT scheme). For contracts including maintenance, the VAT on the service element is 100% recoverable.
One of the major benefits is that there is no disposal risk as the future value is underwritten by the leasing company. Another benefit of Contract Hire is that it is generally ‘off balance sheet funding’ (subject to legislation change) which means it can improve your gearing ratio (assets to borrowing ratio) and therefore possibly your borrowing ability in the future.
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Lease Purchase is for businesses who would like to own a vehicle but do not necessarily have the money to buy one immediately. It is ideal for non VAT registered customers who eventually wish to take ownership. It is a flexible product and it is possible to put down a larger initial payment, which in turn reduces your monthly payments. The monthly cost is worked out on the difference between the retail value and the depreciation value plus interest.
You are entering into a contract to purchase the vehicle at the end of the contract with Lease Purchase. This contract is only for those who are absolutely sure that they want to take ownership of the vehicle at the end of the contractual period and pay any balloon payments associated with the contract. Lease Purchase agreements typically run between 24 and 60 months, although the agreement can be settled at any time.
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You must have fully comprehensive vehicle insurance.
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