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Business Finance Explained

There are three ways to find a vehicle through your business, and each have a different impact on your company’s balance sheet, cash flow and disposal at the end of the contract.

I have listed the characteristics of each plan to give you an idea of the differences and the possible effects on your company, but you should seek financial advice from your accountant who would be able to confirm the most suitable scheme for your requirement within your business.

Hire Purchase

This is the most common form of funding a vehicle through your business and help minimise the effect of the purchase on your company’s cash flow. A deposit is normally required and the remaining balance is financed over a period between 24 to 60 months. During the agreement, the vehicle is technically owned by the finance company but ownership transfers to your company on the payment of the final instalment. The borrowing is ‘on balance sheet’ and means that the vehicle will show on your companies accounts as an asset along with the loan as a liability.

The interest incurred on the loan on an annual basis can be used to reduce the company’s net profit, subsequently reducing the company’s tax liability.

Contract Hire

A convenient way of acquiring the use of a company vehicle for a period of up to 3 years but with no involvement in the disposal of the vehicle at the end of the agreement. This is usually a very simple way of running a fleet of three or more vehicles , with very little capital outlay, possibly including a maintenance contract enabling the use of vehicles but no administration, depreciation or disposal worries.M

An amount of payments are required up front, maybe 3 or 6 followed by 33 or 35 payments, which attract VAT.

To take the best advantage, the company should be VAT registered and should then be able to reclaim a percentage of the VAT charge per payment.

At the outset, a projected mileage per annum is required and the monthly payments are calculated using the projected mileage. A charge per mile will be made at the end of the contract if the projected mileage is exceeded.

At the end of the contract, the vehicle is simply returned to the contract hire company and the company is not involved in the disposal. The agreement would be ‘off balance sheet’ as the vehicle cannot be owned by the company and could be viewed as a long term rental.

Lease Purchase

This is an agreement that has the characteristics of both of the the forms of funding mentioned above.

It has the legal structure of the Hire purchase, including normal monthly payments and ownership responsibility at the end but the payment profile of a contract Hire agreement, 3 + 35 or 6 +35.

The major difference is that it is a Hire purchase agreement with a residual value, thus reducing the monthly payment by defering a percentage of the capital outlay until the final payment. This method of funding is less popular these days, especially with the finance lenders due to the flexibility and unpredictability of the residual value of the vehicles, potentially leaving a shortfall as a liability of the company.

This information is designed as a guide only and any final decision on funding methods should be discussed with your accountant.

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