Funding Methods
Here you will find all the information and details for the various funding methods we can offer. Whether you are a large business with a fleet of hundreds, a small company with one or two vehicles, or even a private individual, we have a finance route suited for your needs.
If you have any other questions or comments, then please do not hesitate to contact us. We will be more than happy to help you understand the benefits of each Finance method.
Personal Contract Hire
Risk: Funder assumes risk.
How it Works:
Personal Contract Hire gives the user a fixed equal monthly rental for a fixed contract term. At the end of the contract term the car is handed back.
Popular With:
Company car drivers who are given a "Car Allowance" instead of a company car thus allowing the individual to make his/her own choice and arrangements. This in turn will benefit the company. This will also avoid "Benefit in Kind" taxation.
Advantages:
- Low initial outlay.
- More tax-effective then Personal Contract Plan if the vehicle is used partly for work.
- The contract is not subject to a final balloon payment.
Summary:
Overall, a convenient and hassle-free funding method with tax advantages.
Hire Purchase
Risk: You assume risk.
Popular With: Smaller companies running fewer than 10 cars. The traditional method for smaller companies who are used to dealing with retail sector. Cash is provided by a dedicated Finance House. The repayment profile is typically an initial deposit of 20% followed by equal monthly installments to repay capital cost of vehicle plus funding.
Advantages:
- Cashflow: payment by installments.
- Writing down allowances apply.
- Interest element allowed against tax.
- An alternative funding line to Bank overdrafts.
- Attracts fixed rate interest.
Disadvantages:
- Inflexible: difficult to escape the outstanding settlement if, say, a vehicle is no longer needed.
- High deposit compared with Contract Hire.
- Appears as a debt on the balance sheet which could inhibit future borrowing.
- Can be more expensive than Contract Hire due to 1995 VAT changes.
- Burden of controlling and running the fleet.
Traditional option which is losing ground. A major casualty after the August 1995 VAT changes, because it does not have any significant advantages - unless being used to purchase pool cars - while Contract Hire is becoming more popular.
Finance Lease
Finance lease is a good halfway house between owning your company car and outright business car usership known as contract hire.
Finance lease has all the benefits of ownership, but many of the cash flow and VAT advantages of contract hire.
VAT advantages of finance lease
VAT is charged on the rentals of a finance lease. Assuming there will be some private use of the company car, 50% of the VAT can be reclaimed.
There is a further advantage to finance lease. The finance company providing the car can reclaim the full 100% of the VAT on the purchase of the vehicle; it can then pass on this VAT saving in the form of lower rentals to you.
Cash flow advantages of finance lease
There are two types of finance lease. Deciding which is right for your business depends on your company's current financial position and whether you want to take advantage of reduced initial payments, followed by a balloon payment (often called fixed payout leases); or a full payout lease.
In the former you sell the car at the end of the rental agreement which should cover the final balloon payment – an agreed amount that should cover the residual value of the business car.
In a full payout lease you can sell the car on behalf of the leasing company, having paid for the cost of the car in the lease rentals, and then receive up to 95% of the proceeds in the form of a rebate from the rental company.
Or, which can be quite appealing if you still enjoy driving the car, enter into a secondary rental period. This second phase of the full payout lease is often called a peppercorn rental, for the very fact it costs very little.
How do I account for a finance lease?
As we mentioned at the start, a finance lease is very much a halfway house between outright purchase and contract hire. And so it is with the accounting procedure.
For purposes of the ownership of the car, the leasing company holds title to it (although the car is shown as an asset on your company's books).
However, there are no capital allowances available on a finance lease. Instead the rentals are fully tax deductible if your car has CO2 emissions below 160g/km; or, if the emissions are above 160g/km, subject to a 15% restriction. These business car accounting rules have replaced the old 'half the excess' rule since April 2009 on all new business car acquisitions.
A word of warning about finance leases
One of the advantages of finance lease – particularly for those operating vans – is that there is perceived to be less of an issue over the condition of the vehicle at the end of the lease period.
Personal Contract Purchase
Risk:The individual can have the option to buy the vehicle without assuming any residual value risk.
Personal Contract Purchase is really a lease purchase agreement where the customer has the option at the end of the agreement to either return the vehicle or pay the agreed balloon payment and keep or sell the vehicle.
The balloon payment relates to the anticipated future value of the vehicle, the future value is based on the mileage set for the contract at the start.
Advantages:
- Low initial outlay.
- Customer has the option to either purchase or return the vehicle at the end of the contract.
Disadvantages:
- Personal Contract Plan is not as tax effective compared with Personal Contract Hire and is usually more expensive.
Personal Contract Purchase is becoming more and more popular with employees, constantly looking at their tax liabilities in relation to company motor cars.
Lease Purchase
Risk: You assume risk.
Popular With: Fast growing small businesses who cannot afford upfront business costs. Contrary to its name, this is not a lease but a purchase scheme similar to Hire Purchase but with an inverted payment profile: a lump sum being paid at the end of the vehicle's life as a final 'balloon' payment.
Advantages:
- Cashflow: smaller front-end deposit and lower monthly charges ease the initial repayment burden.
- Investment: allows more cash to be pumped into the business early on, and is therefore attractive for companies with high start-up costs.
- Others same as 'Outright Purchase'.
Disadvantages:
- The business must be in a healthy shape at the end of the vehicle's fleet life to pay the balloon, which may exceed the vehicle's residual value.
- Exposure: the fleet may become vulnerable to residual value decreases and exceptional maintenance costs. You will need high calibre expertise to manage this method of acquisition effectively.
- Budgeting: it is difficult to provide robust forecasts with this level of risk.
- VAT not recoverable unless 100% business use.
Useful for companies with high initial start-up costs, as it delays the repayment burden until later in the vehicle's operating cycle. Steadily losing ground to Contract Hire, particularly since the tax changes in August 1995.
Contract Hire
Risk: Funder assumes risk.
Popular With: All fleets able to reclaim VAT. The leasing company calculates a residual value for a vehicle at a set age and mileage contract, and charges the user a monthly fee to cover depreciation over that period, plus a funding charge, along with add-on services such as maintenance and accident management. The user takes no risk in ownership and has predictable monthly costs. The user effectively just pays for the use of the vehicle.
Advantages:
- Cashflow little or no payment.
- Costs are predictable and risk-free.
- Payments take into account the vehicle's future residual value, so the user doesn't have to repay the entire capital cost.
- Vehicles are off balance sheet.
- The administration and management burden can be transferred to a third party.
Disadvantages:
- 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.