AS we come out of lockdown, many van operators are thinking about updated their fleets – but what’s the most suitable way for your type of business to fund it.
There are certainly a number of different ways to pay for the new vehicle. Perhaps somewhat surprisingly, the choice could come down to just how dirty your van is likely to get during its working day.
The best way to fund a new van which will be used by a builder or plasterer – and so tends to take a bashing – is usually different to the best way to fund one used in cleaner trades, like plumbing or by electricians.
So if you can guarantee the condition of your vehicle and are VAT registered contract hire is a suitable option. But if your new van is less likely to stay pristine finance lease could be the way forward.
Contract Hire
Contract Hire, which is sometimes referred to as an Operating Lease, is a long term rental agreement of 12- 60 months which you can have with or without maintenance.
It‘s popular with VAT registered companies as they can generally claim back 100 % of the VAT on the finance element for commercials (subject to no private use, no exempt turnover and not being on the Flat Rate VAT Scheme).
Without maintenance schemes are cheaper on the face of it, but don’t forget you are going to have to pay for all the servicing and repair costs. And be warned, any damage that’s not considered fair wear and tear can lead to expensive penalties.
If you include maintenance in the package it’s more straightforward as you simply pay an initial deposit of around three months rental and then a fixed monthly fee.
And with this type of contract the VAT on the service element is 100% recoverable. At the end of the contract you simply hand the van back and get a new one to replace it, but again make sure it’s in good condition or you could face penalties.
Contract Hire is generally ‘off balance sheet funding’ which means it can improve your gearing ratio (assets to borrowing ratio) and therefore possibly your borrowing ability in the future.
Other advantages include: No vehicle disposal problems; Reduced administration; Optional replacement vehicle cover in case your van breaks down.
Disadvantages include: You will never own the vehicle and there is no option to buy; Early termination can be expensive; If your van does more miles than agreed in the contract you will be charged excess mileage.
Finance Lease
Finance lease is popular with van operators and comes with all the benefits of outright ownership, but many of the cash flow and VAT advantages of contract hire and so is seen as a good compromise between the two.
Just like contract hire you pay a deposit followed by fixed monthly payments.
You have a choice of either going for lower monthly payments followed by a large payment at the end of the lease – the balloon payment – which is normally covered by the sale of the van, or paying more each month and then getting back up to 95% of the price the van is sold for in the form of a rebate from the rental company.
If you opt for the second choice and, at the end of the agreement, think there is still plenty of mileage left in the van you can always enter into a secondary rental period, often called a peppercorn rental as it costs very little.
Finance lease is a very popular choice for VAT registered companies as they can generally claim back 100% of the VAT on commercial vehicles (subject to no private use).
Advantages include: Minimum capital expenditure; Accurate monthly budgeting; A fixed interest rate is available on some contracts; No damage recharge as you are responsible for disposal of the vehicle; Reduced administration; Optional replacement vehicle cover in event of breakdown
Disadvantages: You will never own the vehicle as the vehicle must be sold to a third party as the end of the agreement; Operating risk associated with the vehicle; Interest rates can vary on some contracts; You must have fully comprehensive vehicle insurance.
Hire Purchase
Hire purchase is a term everyone is familiar with and basically means you agree to buy the vehicle over a set period, normally three years, by paying agreed monthly instalments.
When you make the last payment the van is yours to carry on using or sell on. Stating the obvious you are responsible for its maintenance as well as road tax (VED) while making the hire purchase payments.
The tax man treats hire purchase as a deferred purchase agreement rather than a hire agreement so for corporation tax purposes the van is deemed to belong to you from delivery, so you can claim capital allowances as if you had paid for it in full on delivery.
Advantages: A very simple method of finance; You can obtain capital allowances from the date of delivery; It does not suffer a partial lease rental tax disallowance
Disadvantages: It’s an on balance sheet form of finance; There is no guarantee of the value of the vehicle at the end of the agreement; All the VAT element of the purchase must be paid up front
Contract Purchase
Contract Purchase is for business customers looking to fund a new vehicle in a manageable way. A little like hire purchase. The monthly payments are not subject to VAT, but if you do take out the optional service package you will have to pay VAT on the service costs.
This type of funding is ideal for businesses that would like options at the end of its finance agreement.
Customers make an initial payment when they first take out the contract, then pay fixed monthly payments and finally have an Optional Final Payment at the end of the contract. You can keep the van by making this final payment, trade-in your vehicle at a dealership and take another vehicle from them or simply return the vehicle to the funder.
Advantages: Low initial payment; Fixed monthly payments; No depreciation concerns if you want to walk away at the end; Maintenance and servicing can be included; Cost effective
Disadvantages: You must have fully comprehensive vehicle insurance
Lease Purchase
The main difference between Lease Purchase and Contract Purchase is that with Lease Purchase you enter into an agreement to buy the van at the end of the contract while with Contract Purchase you have the choice to buy or not.
Lease Purchase normally lasts 2-4 years and is for people who would like to own a vehicle but don’t have the money to buy one immediately.
It’s ideal for non VAT registered customer who eventually wants to own the van they are buying.
You have the flexibility of putting down a larger initial payment to reduce the monthly payments which are worked out on the difference between the cost of the vehicle and the depreciation value plus interest.
Advantages: Monthly payments are not subject to VAT; The vehicle will become a company asset; Lease Purchase frees up finance for other aspects of your company; Low initial payment.
Disadvantages: In some cases the larger final payment can be larger than the value of the van; No maintenance included.
However, reflecting on 2020 it was difficult to focus on anything but COVID-19.
It impacted everything from our personal relationships and social lives to our businesses and our ways of working. For the van business, however, the Pandemic turned into something of a boom time.
The LCV market flourished as home deliveries soared and so did the demand for funding to buy new vehicles.
Mercedes-Benz Finance, winner of this year’s Business Vans Funder Award, said that it tailored solutions and advice to keep business moving.
It continued to provide access to its free and dedicated Business Manager Service. Available through the Mercedes-Benz dealer network, it gave customers guidance and support on the best finance solution for their business.
During the year Mercedes-Benz Finance launched a new and flexible funding solution for electric vehicles: eReady Finance. Switching to electric is a big decision for any business and businesses need to understand the full picture.
This includes a van’s capabilities through to the wider infrastructure, the total cost of ownership and the finance options available.
M-B Finance said that many of its customers want to try an electric van and its flexible eReady Finance product helps make this switch with a level of commitment customers feel comfortable with.
This includes:
- Flexible finance terms available, starting from 12 months
- A regular review of finance and vehicle options
- A choice to return the van, replace it with a newer model or renew the finance agreement at a reduced cost at the end of the contract.
During an incredibly challenging time, M-B Finance created a flexible workforce, redeploying people to work in a taskforce that solely focused on helping customers to keep their businesses moving.
Aside from this personal level of customer care, it focused on delivering solutions that are available 24/7 as well as remote solutions like ‘click to sign’ allow customers to review and securely sign new agreements electronically.
A digital customer portal, Mercedes me finance, allows customers to manage agreements online, change payment dates, update contact and bank details, make payments or request a settlement quote.
To find out more about Mercedes-Benz Finance click here
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