Finance Lease

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Simple Guide to Finance Lease

Flexibility is one of the keys to success for any business, large or small. If your business requires one or more vehicles but does not have the finance to pay for the asset, then a car finance lease could be the solution. It’s an alternative to hire purchase with more freedom but just how does a finance lease work and is it right for your business?

A finance lease is a method of financing a vehicle that is usually accessed by VAT-registered businesses and companies, however sole traders and partnerships can also take advantage of finance lease.

It is a form of car finance where the vehicle remains the property of the finance company, with the vehicle effectively hired out to a business. The business can then use this asset while paying an effective rental rather than a repayment.

The monthly rental is determined by the initial cost of the vehicle, the period of the finance lease, the residual value, and the end balloon payment (not necessarily the vehicle’s residual value). As a residual value is used to calculate your monthly rental, most finance lease companies will insist that you stick to a strict mileage limit as this mileage restriction is used to determine the future value.

You have full use of the vehicle during the finance lease period. At the end of the finance lease agreement the vehicle is sold to a third party by the finance company, if the sold price is above the predetermined balloon payment then the finance company will refund a percentage of the proceeds back to the hirer, if the sale price is below the balloon payment then the hirer will be liable to make a further payment to the finance company.

Finance lease agreements are also available to businesses looking to pay the entire cost of the vehicle, including any interest, over an agreed lease period.

Some finance lease companies may offer you the chance to extend the finance lease with a secondary rental.

There are numerous benefits to acquiring a finance lease. These include:

  • Low monthly costs and initial outlay – One of the main reasons why companies take on finance leases is to avoid the initial hefty outlay.
  • Flexibility – Most finance lease companies will offer a number of payment options to suit your cash flow. You can make deferred payments, lowering the monthly rental with a balloon payment at the end of the contract, or you can pay the entire cost in monthly instalments.
  • Latest vehicles – You can gain access to the latest vehicles that would otherwise be unaffordable.
  • VAT payments – Up to 50% of the VAT payments can be reclaimed.
  • Balance sheet – Taking out a finance lease allows you to feature the vehicle on your balance sheet, and outstanding rentals are represented as a liability. Hire rental tax allowances can be applied for.
  • Sales proceeds – You can boost your equity by receiving a proportion of the sale at the end of the finance lease term.

There are disadvantages to finance leases too. Primarily these are that you will never take ownership of the vehicle as the car or van must be sold to a third party. A further disadvantage is that the hirer also takes on the administration and operating risk associated with the vehicle, including the road fund licence.

A finance lease removes the pressures of heavy initial outlays. It is a proven method of giving your business access to the latest vehicles without actually having to take ownership and buy them outright. There are also tax benefits too, which make this an ideal car finance method for many businesses.

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