A Simple Guide to Business Vehicle Finance

Whether you’re looking for your first delivery van, an addition to your fleet, or a slick new company car, there is a wide range of options for business vehicle finance. Here we take a look at the advantages, some of the most commonly used arrangements and how they could help you fund new and used vehicles for your business. 

What is vehicle finance for businesses?

Vehicle finance allows businesses to fund new and used cars, vans, lorries and other commercial vehicles without having to pay the full cost upfront. Instead, businesses from sole traders to limited companies can either rent the vehicles they need, or spread the purchase cost over monthly instalments. 

What are the benefits of vehicle finance for businesses?

The main advantage of using vehicle finance for your business is that you can get quick access to vehicles without paying a big outlay. By spreading the cost of the vehicle over its useful life, you can avoid having to pay for it all upfront and have more manageable monthly repayments

Depending on the form of vehicle finance you take, it may also come with VAT and tax benefits, repair and maintenance management.

Key terms to understand for vehicle finance for businesses

When it comes to vehicle finance agreements, there are a few terms that come up often that it’s good to understand.

Depreciation – This is how much the vehicle will lose in value over the course of the contract. A new vehicle can lose over half its value in just a few years, and this could be factored in to the agreement you take.

Residual value – This is the value of the vehicle at the end of the contract. In some cases, the finance or hire company will make an estimate of the residual value at the start of the contract, and this will be used to calculate your monthly repayments, interest, and any final payments.

Balloon payment – For some types of vehicle finance, you will have an option to buy the vehicles at the end of the contract. Depending on your arrangement, there can often be a lump sum needed to cover the outstanding balance, which is known as a Balloon payment. 

Depending on what you prefer, you can avoid having to pay a balloon payment or having to worry about residual value and depreciation. More on this below. 

What are the different types of vehicle finance for businesses?

Fixed vs Variable rate

Depending on the provider, you could have fixed or variable rate options. Fixed rates mean you’ll have fixed monthly repayments throughout the contract. Variable rates will go up or down in line with the Bank of England base rate, and can have more flexibility around early repayment options. 

Contract Hire

Contract Hire is the simplest type of agreement and works like a normal rental. You pay monthly instalments for use of the vehicle, and the hire company continues to own it and is responsible for it, and the cost of servicing, breakdowns and tax is included in the price. 

It will have mileage limits that you’ll agree to at the outset, with a price per mile over that amount. There is no option to buy at the end of the agreement. 

As you won’t own the vehicle, if it has depreciated in value more than expected over the course of the agreement, this will only affect the finance/hire company, so you don’t need to worry about it. 

Finance Lease

With a finance lease, you rent the vehicle, but also take responsibility for it. So you need to repair it, but can profit from keeping it in a good condition.

Typically, at the end of the contract the vehicle will be sold to a third party. If the value of the vehicle turns out to be higher than the original estimate (e.g. because you’ve done less mileage or kept it in better condition), you get to keep the extra. If it’s less, then you have to pay the difference.

In some cases you may also have an option to keep the vehicle yourself, provided you pay any remaining balance. 

Hire purchase

This is the most common form of vehicle finance for businesses at the moment. Unlike other agreement types, hire purchase only looks at the current retail price of the vehicle, and doesn’t consider its future resale value (residual value). Instead of paying the upfront cost in one go, you pay it in instalments. 

Typically the cost of the vehicle plus interest is spread over the term, with a small fee to buy at the end of the contract. You’ll then own the vehicle outright. In some cases there may be a larger balloon payment.

Lease purchase

With a lease purchase, you pay for the vehicle in instalments throughout the contract, with an obligation to buy at the end. However, instead of just using the current price of the vehicle, your repayments will also look at the expected resale value at the end of the contract (the residual value). 

Typically this type of arrangement will have lower monthly repayments than hire purchase, meaning more cash flow for other things, but a larger balloon payment at the end of the contract. There is also less flexibility at the end of the contract than a contract purchase or lease, as you cannot return the vehicle. 

Lease purchases are purely a financial agreement, and do not include maintenance packages or other add-ons.

Business Contract Purchase

Similar to a Lease Purchase, with a Business Contract Purchase you also pay in instalments throughout the agreement, with a predetermined balloon payment to buy the vehicle at the end. 

However, at the end of the contract, you can decide whether to sell the vehicle, return it to the finance provider or purchase the vehicle at the agreed price. A contract purchase often comes with maintenance packages too.

Business loan

You can also use a more traditional business loan to fund the purchase of new vehicles. As with the other options, you’ll avoid the upfront cost of acquiring a vehicle and repay in monthly instalments. With a business loan, you’ll be a cash buyer and have full ownership of the vehicle straightaway, giving you more control if you wanted to sell it or make moderations. 

With some providers, like Funding Circle, you can settle the loan early with no fees, which often isn’t available for other forms of vehicle finance. However, as you won’t be using the vehicle as collateral on the loan, it may be more expensive than other options. 

What are the tax benefits of vehicle finance for businesses?

Depending on the type of vehicle finance you use, you could benefit from different tax breaks to make it more affordable:

• Claim up to 50% of the VAT on cars and 100% on commercial vehicles (subject to being VAT registered)
• If the vehicle appears as a balance sheet item, the value of it can be written down against taxable profits
• Capital allowances, particularly for electric or cars with zero CO2 emissions

Please check with your provider, accountant or tax advisor for more information. 

How can we help with vehicle finance for businesses?

At Funding Circle we work with a range of finance providers who specialise in vehicle finance. Our team will help you find a provider to suit your needs, saving you time looking for a quote. 

Enter your details in our simple form and you could have a decision in as little as 1 hour. 

While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.