Finance Explained

Finance Explained

Your choice of van isn't just about cost, it's about your business's cash flow as well. Consideration of various finance alternatives must be a fundamental part of your van choice.

Buying Outright

Well, it's simple. You plunk your money down (plus VAT) and you own your van. You may be able to borrow against its value and you'll enjoy a capital allowance against taxable earnings. While its easy, buying outright significantly disrupts your cash flow and therefor may not be right for you.

Hire Purchase

An instalment loan with which to buy your van. You'll have to pay the VAT upfront and you may also have to pay a deposit, but you can typically pay off the loan over as long as 60 months. You hold the van on your balance sheet and enjoy the same tax benefits as buying outright. What's more, because it's your van, you can early-terminate at any time by simply paying off the balance. In certain circumstances, monthly payments can be reduced by building in a final “balloon” payment tied to the van's expected market value.

For most customers, hire purchase presents the lowest over-all cost and the greatest flexibility.

Lease Finance

Effectively a long-term rental of someone else's van. Like hire purchase, you typically pay over 24 to 60 months. While VAT is due only on the payments, you'll likely pay an up-front deposit equal to between 1 and 6 monthly payments. Like hire purchase, a final “balloon” tied to expected residual value can sometimes be used to reduce monthly payments. In most cases, payments are 100% tax deductible.

Sounds pretty good, but there are drawbacks. Lease finance is nearly impossible to early-terminate without significant penalty. At lease termination, you participate in any “gain on sale” realised, however you also bear risk of any loss brought about by a final balloon payment or early termination. Furthermore, failure to maintain the vehicle within strict mileage and condition standards can result in significant penalty.

Summary

Your decision as to which form of finance is right for you rests on a number of issues including:

  • Your expected business requirements and cash flow
  • Your tax situation
  • Your tolerance for risk
  • Other financial and operating criteria.

Both hire purchase and lease finance can present very attractive monthly payments by increasing the initial deposit and/or incorporating a final “balloon” tied to the expected market. However, the mileage stipulation and early-termination penalty of lease finance require much greater certainty as to the future of your business. Whichever form of finance you choose, you must consult your tax advisor.