There are ways of financing pretty much anything you need to run your business these days – the difficulty is in knowing what the funding options are, and deciding on the best one for your business. The same applies if you need a new van.
One option, of course, is to buy the van outright. But perhaps you can’t afford the lump sum this would involve, or you’d prefer not to have so much cash tied up in one go.
Each of the options available come with their own features and benefits. Whether you’re a sole trader looking for one van, or a large company running a fleet of vehicles, the first step is understanding what types of van finance are on offer.
What are the options?
The options fall into two categories: van leasing and van finance. Leasing is essentially renting the vehicle for a set amount of time, while van finance is buying the vehicle in instalments.
Sounds simple in theory, but it gets more complicated by the fact that different lenders use different terminology for van finance and van leasing, and some offer a combination of both.
Here’s a basic overview to help you get started:
Van leasing, or contract hire
Van leasing is also known as contract hire. You essentially rent the van for a set period of time (usually between one and five years) and for a set monthly payment. When that contract is up, you’ll usually return the vehicle to the lender.
Pros
One of the main advantages of leasing is that you can get a new or upgraded vehicle every few years – at the end of your contract. This can be a big draw if your vehicles are used heavily, and it means your workforce will be driving around in newer, more reliable and more professional looking vans.
Another big advantage is that you can add a maintenance agreement to cover servicing and repairs. There may also be additional incentives thrown in such as breakdown cover and insurance, as well as the benefits of a manufacturer’s warranty for new vehicles.
There are various tax implications for both van leasing and van finance. Van leasing is an operating cost, so the van won’t appear on your balance sheet as an asset and the monthly payment can be offset against taxable profits. If you’re VAT registered, you may be able to reclaim VAT too, if the vehicle is solely used for business purposes. You should talk to your accountant before making a decision though, as everyone’s tax situation is different.
Cons
Because someone else retains ownership of the van, leasing does come with its constraints. Contracts typically have annual mileage limits, and going over can be costly. The van will also need to be kept in good condition as you could be charged for any damage.
Leasing can also be restrictive if you need to make lots of adaptations to your vans, such as shelving, bulkheads or skins. Paying for this each time you lease a new vehicle could be more costly than buying a van outright and paying for these modifications once.
Van finance, or hire purchase
Van finance is also commonly referred to as hire purchase or lease purchase, and involves buying a van in instalments over a set period of time, rather than having to pay for it in full at the outset. At the end of the repayment period, or contract, the van is yours to keep.
Pros
If you need a van for a long time, then it might make sense to buy it ‘on finance’. That way, the monthly payment will eventually stop and you’ll have one less bill to pay.
If your requirements are more predictable, van finance can represent the better deal overall as the flexibility of leasing usually comes at an increased cost. Tax wise, buying a van using hire purchase will appear on your balance sheet at the start of the contract, so it’s slightly different from your accountant’s point of view.
Cons
Buying a van on finance means you are responsible for all repairs, servicing and tax, the same as if you had bought the vehicle upfront. However, paying for repairs as and when you need them could still work out cheaper than paying a monthly maintenance agreement.
It’s also worth noting that the monthly payment could be higher, because you’re paying for the entire lifespan of the van rather than just a couple of years of usage.
Finance lease
Finance leasing essentially offers the best of both worlds, with the benefits of leasing but with the option of buying the vehicle at the end of the contract. The amount you pay is called a ‘balloon payment’ and is determined by the value of the van at the end of the contract, minus what you’ve already paid. You can usually get funding to cover the balloon payment too.
If you don’t want to buy the van, you simply return it as per the terms of a standard leasing agreement. That means finance leases are a good option for those who are finding it hard to choose between contract hire and hire purchase.
Conclusion
As with any finance for business, the trick is making sure you choose the right deal for your circumstances and requirements, bearing in mind other important considerations such as any upfront deposits required, the size of the monthly payments, the depreciation of the vehicle, and your future needs.
Whatever you choose, seeking expert help at the outset from companies like Funding Options can save you hassle in the long run.
Conrad Ford is Chief Executive of Funding Options, recently described by the Telegraph as “the matchmaking website for small businesses and lenders”. Funding Options has been selected by HM Treasury to help businesses find finance when they’re unsuccessful with the major banks, as part of the Bank Referral Scheme that launched in November 2016. @FundingOptions
