How Finance Lease works
With a Finance Lease, the finance company buys the vehicle you choose and then hires it to your business for a fixed monthly cost.
Much like Contract Hire, the amount you pay is largely based on the length of the contract, the number of miles driven, and the likely end-of-contract resale value. At the end of the contract, the vehicle is sold to a third party to raise funds for the final payment.
In many ways, Finance Lease is a hybrid between leasing and buying. The monthly payments are worked out in a very similar way to Contract Hire but, once it is time to hand the vehicle back, the process works very differently
Unlike Contract Hire, where the leasing company takes all of the depreciation risks, Finance Lease agreements mean that both the risk and reward are retained by you.
It works like this. The original agreement contains a final balloon payment based on the anticipated resale value of the vehicle. When the time comes and the vehicle is sold, you receive the vast majority of the proceeds (usually 98%). This money can then be used to pay the final amount due under the contract.
In terms of accounting, the vehicle will appear on your balance sheet, with the outstanding payments showing as a liability. The payments can normally be offset against taxable profits, but cars emitting more than 110g/km can only claim 85%.
VAT on the finance payments can generally be reclaimed at 50% for cars and 100% for commercial vehicles (or cars with no personal usage). VAT on additional services, such as a maintenance package, are fully recoverable.
Flexible repayments
Companies looking to improve cash flow can choose a larger balloon and lower monthly payments. On the other hand, you could decide to pay higher monthly payments and leave less (if anything) to the end of the contract.
Finance Lease is a way of taking on board both the risks and rewards of vehicle ownership, but without tying up large amounts of capital from day one.
Things you need to know about Finance Lease
Although you don’t own the vehicle, you do take on all the depreciation, administration, and operating risks. If the resale value is less than the balloon payment, you will need to pay the difference. On the other hand, if a higher amount is achieved, this will give you some extra funds to put towards your next vehicle. There is also an option to keep the vehicle using a small ‘peppercorn’ agreement.
Is Finance Lease right for my business?
Finance Lease is popular with businesses who are happy with the risks and rewards of ownership but like lower monthly payments which are scaled to support their cash flow needs. Finance Lease is often the vehicle finance method of choice for van operators who are looking for a tax-efficient funding option without punitive end-of-contract damage charges.
