Choosing how to buy your van is critical to an owner or business, so having the right van finance is really important.
We'll give you a quick rundown of the important terms you'll find in the world of van finance that will help you navigate the tricky terms used when it comes to buying a van.
While some firms insist on paying up front for their new vehicles and owning them outright, most operators are aware that this is not the only way: choosing the appropriate finance option can improve cashflow and tax planning.
Financing the purchase of a new vehicle can appear complex and risky – but by asking a few relevant questions, the choice of a finance package becomes much easier.
The first issue is whether the operator wishes to own the vehicle outright; if so, the choice of finance packages is straightforward. If ownership is less important, then the issues come down to cashflow, flexibility – an operator may wish to operate the vehicle only for the length of a customer contract – and whether the vehicle should appear as an asset on the balance sheet. With any financing option, it is important to investigate the choice of finance providers: the main options are banks, specialist leasing and contract hire firms and the manufacturers’ own finance arms.
Manufacturers do not just finance their own products: they will look at the complete package, including bodywork and equipment and even competitors’ vehicles. Whichever option an operator goes for, it is vital that they take financial advice on the tax position, and that they examine any agreement carefully to check interest rates and additional fees.
Specialist information on rental and leasing can be obtained from the British Vehicle Rental and Leasing Association, which is the trade body for companies which rent and lease cars and commercial vehicles.
Few operations have the cash reserves to buy large assets such as vehicles outright without some form of financing – and those that do might be better off keeping their cash in reserve for shorter-term commercial opportunities.
Hire purchase (HP) is the ‘traditional’ way to finance a vehicle purchase: the vehicle itself is effectively collateral for the loan, which is paid off entirely within a fixed time. The vehicle remains the property of the lender, and if payments are missed, it can be repossessed. At the end of the loan term, the borrower pays a fee (which may be less than a monthly payment) and takes full ownership.
The obvious benefit to the operator is in terms of cashflow, and with initial agreement lenders may be able to offer variable payment terms.
During the HP period, the borrower is the ‘Registered Keeper’ of the vehicle – it is an asset on their balance sheet – and can claim the appropriate capital allowances. There is another tax benefit, in that interest on the repayments is allowed to be set against profits. However, VAT is payable on the initial purchase, which is reflected in the payments.
This is similar to hire purchase, except that the regular payments do not cover the full purchase price. Instead, a larger final payment (sometimes known as a ‘balloon payment’) is required to take ownership of the vehicle.
Leasing can be an attractive choice if the customer does not need to own the vehicle outright; the vehicle is effectively bought on the operator’s behalf, and the operator pays a regular rental fee over a fixed term. This rental is lower than a typical hire purchase payment and is tax-deductible, although it does attract VAT.
The choice of leasing is very often driven by accountants. It can be very attractive not to have an asset showing on the balance sheet. In this case an operating lease or contract hire is the way to go. Contract hire can eliminate worries over residual values or maintenance.
The BVRLA says that a typical van lease contract is over a four-year term at 18,500 miles per year. Whichever scheme is chosen, the final condition of the vehicle can be critical to ensure that no penalties are charged. The BVRLA’s ‘LCV Fair Wear & Tear Standard’ establishes standard conditions for the return of vehicles, while organisations such as the Freight Transport Association (FTA) offer independent end-of-lease inspections.
With a finance lease, the operator pays regular rental fees on the vehicle for a fixed period; there is no high initial outlay, but the vehicle remains on the operator’s balance sheet. At the end of the lease period, the rental agreement may be renewed (at a lower rate) or the operator may dispose of the vehicle, keeping a substantial portion of the sale price.
With an operating lease, the operator pays regular rental fees, which are lower than with a van finance lease because the residual value is taken into account, and the vehicle remains ‘off balance sheet’.
At the end of the finance period, the rental agreement may be renewed or the vehicle may be returned. There is no depreciation risk, but strict terms of mileage and usage are applied – excess mileage and damage penalties may be payable – and the operator recovers no value from the vehicle at the end of the term.
Contract hire works like an operating lease, in that the asset is off the operator’s books, rental fees are fixed and allowable against tax and the vehicle is returned at the end of the contract. But contract hire rental payments can incorporate repair and maintenance contracts (on the chassis, bodywork and equipment), road fund licence fees, tyre management, breakdown cover and almost every other aspect of fleet management.
Essentially, contract hire makes it easy to predict and budget for almost all the costs of operating a vehicle, and is proving increasingly popular.
