Make vehicle finance work for your business
What to look out for
- Red A business may not qualify for a large loan to purchase vehicles outright
- Amber Lease-type options can lower the monthly payments required
- Green Vehicle finance can help a business grow faster
Looking to hire a car for your business, take out finance for a truck or find a van finance company. Here’s your chance to discover the right vehicle finance for your business.
Why would you use vehicle finance?
Vehicle finance allows a business immediate access to vehicles it cannot afford to purchase with cash. A bakery, for example, could use van finance to obtain a van to pick up supplies and deliver its baked goods to shops. Some businesses require multiple vehicles and financing also makes that possible.
Whether it’s company car finance for a fleet of cars for sales reps or truck finance for a removals company, vehicle finance means businesses can grow faster.
How does vehicle finance work?
The good news is that there are many business car finance choices and it’s worth taking the time to research the best option for your business.
Taking a standard business loan and using that as truck funding or for business car purchases means your business owns the asset immediately and can use it for as long as you wish. You can even sell on the truck or car. You will have to qualify for the full amount of the loan and maintain the payments.
Asset finance is another option. Car asset finance provides funds for the outright purchase of the vehicle, which acts as security for the loan.
Purchasing vehicles outright requires a large amount of money. A business may not qualify for such a large loan and the monthly payments would be too high. There are options, which we’ll call “lease-type” options, that can lower the monthly payments required.
Contract hire has a fixed monthly payment and can include maintenance and service, if that option is selected, also for a fixed price per month, although contract hire is only available to limited companies, sole proprietors and partnerships. The vehicle does not appear on the balance sheet as an asset. However, there is no option to purchase the vehicle at the end of the term.
A contract purchase is similar but allows the option to buy the vehicle at the end of the term by paying a final balloon payment. The vehicle remains the property of the lender until you make the final payment.
Business car hire purchase finance, more often referred to as a finance lease, allows a company to either finance the entire cost of the vehicle via monthly payments or agree a balloon payment at the end of the term. The vehicle remains the property of the lender and is sold at the end of the term.
A lease purchase has regular payments and a final balloon payment, but it is strictly a financing arrangement, with no maintenance or service bundled into the cost. Ownership passes to the business as soon as the lease purchase begins. At the end of the term, the business must pay the final payment and purchase the vehicle. Lease-type options can have various VAT benefits for VAT-registered companies. You should discuss these options with your accountant.
What are the costs of vehicle finance?
The costs of vehicle finance depend on the type of finance you choose. If you take a business loan or arrange asset finance, you will have regular loan repayments. Your interest rate will be determined by your credit history and credit score, the amount borrowed and the length of the term. You will also need to consider any additional fees, such as set-up fees and early repayment fees. Check with your lender.
Lease-type finance arrangements charge interest on the amount you are borrowing. Again, the rate will be determined by your credit history, the amount borrowed and the term. For these types of financing, borrowing terms are typically 12 to 48 months.
Some lease types of finance allow for the inclusion of service and maintenance, which increases the monthly payment. Such finance schemes will also have a mileage limit and require the vehicle to be in a state of good repair if you are returning the lender. This could result in surprise costs if you do not negotiate terms at the beginning.
How long does it take to secure vehicle finance?
If you have an established business with a good credit history, all your books are in order and you have a business plan, your application can move very quickly for a business loan. It could take a matter of hours to be approved.
For lease-type options, the vehicle or vehicles need to be selected and then delivered or, if not in stock, ordered. Common, in-stock vehicles may take only 10-14 days, though three to four weeks is not uncommon.
If the vehicles must be ordered, it may take considerably longer to receive the vehicles and finalise the deal. However, you should still have all your business documentation ready when you start the application process.
What type of security do I need for vehicle finance?
Business loans for smaller amounts (usually below £25,000) may be available unsecured. For amounts above that, you will usually need to offer security. This is property that is worth more than you are borrowing. It could be property (a factory, shop or your home), a vehicle or shares, for example. If you do not make payments, the security could be seized, in addition to the commencement of legal action.
Asset finance is secured against the vehicles it finances.
The lease-type options require a deposit up front followed by your monthly payments. The vehicle then acts as security against the borrowing. If payments are missed, the vehicles will likely be seized unless you have negotiated leniency with your lender.