BEST PRACTICE FUNDING
THE MANY WAYS COMPANIES CAN OPT TO PAY FOR VEHICLES Here, we look at the pros and cons of five funding choices
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usinesses looking to source vehicles face a multitude of funding options. The most popular choice is contract hire, which sees a company hire a car from a leasing company for a set period and predetermined maximum mileage at fixed monthly rentals. However, while it works for many businesses, others may benefit by acquiring a vehicle through a different funding method. There is no one-size-fits-all solution. Some companies employ different options for different vehicle types, typically known as ‘blended funding’. Here we look at the main funding methods available and their pros and cons.
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CONTRACT HIRE/OPERATING LEASE When a business takes on a vehicle through contract hire, it never owns it. The monthly rental or lease rate usually takes into account the cost of the vehicle including registration fees, road tax, its period of use and agreed mileage, funding costs and its estimated residual value (RV) at the end of the contract. Vehicle mileage will have a big impact on the lease rate because the number of miles has major implications for both service requirements and resale value. Underestimating mileage can reduce the monthly rental rate for the lessee, but it can result in excess charges at the end of the contract if contracted mileage is exceeded. The monthly rate for most contract hire agreements will also include a ‘service’ element of the rental, which can cover a range of additional services. Examples include maintenance, replacement vehicles, roadside assistance, accident management and fuel cards. Hirers are able to choose from a menu of options to meet their individual needs and level of in-house fleet support resources.
PROS ■ Fixed-cost motoring ■ Frees up capital and off-balance sheet (for most companies) ■ 100% of VAT reclaimable provided vehicle is only used for business ■ 50% of VAT is reclaimable if private use is allowed on finance. ■ Rentals considered an expense item ■ Additional line of finance that may not affect banking arrangements ■ The leasing company reclaims input VAT thus reducing the capital cost CONS ■ Need to accurately estimate the time and mileage for use of the vehicle ■ No option to buy the vehicle ■ At risk of end-of-contract charges for damage
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