What is commercial vehicle leasing?

If you want to lease commercial vehicles there's a wide range of leasing options available.

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What is commercial vehicle leasing?

Before we consider what commercial vehicle leasing is, we need to have a basic understanding of what leasing is in general. Business owners will often need to use a commercial vehicle, but might not have the required cash in hand to pay for it upfront. For this reason, and to pass the risk of ownership on to the lender, businesses will enter into an agreement to use the vehicle, without owning it, at least until the end of the contract, but this will depend on the type of vehicle financing used.

What is leasing?

Commercial vehicle leasing is in essence the process of renting a commercial car solely for your business, without the need to incur the hefty upfront costs of purchasing it outright. At the end of the agreement, you won’t have to worry about trying to sell the vehicle, as the lender will accept its return, as long as any outstanding monthly payments have been cleared. Business owners can get the latest vans on the market for a low-cost monthly repayment amount, and this can be returned for a newer model at the end of the leasing term.

How does leasing work?

Once you have decided which vehicle you want to hire via car leasing, you will need to decide whether you want a term lasting 24 months or a longer period of up to 54 months — five years tends to be the upper limit. You will then have to agree on the annual mileage limit that will suit your needs. The mileage limit you choose will reflect your monthly payments, so it's best to assess your mileage requirements carefully before leasing a new business car.

Bear in mind that exceeding your annual mileage limit will result in penalty charges, so if the car is for you or employees, it's best to calculate exactly how much mileage will be needed and estimate 10% extra just in case you go over your original prediction. The mileage limit can usually be reviewed and amended over the duration of the agreement as your business requirements evolve and change over time. It’s recommended that you include a service and maintenance plan, which will cover the running costs of the vehicle from servicing to roadside assistance.

How to finance your company vehicle?

There are a few ways that you can drive a brand new commercial vehicle without paying for it in full, including hire purchase, finance lease, and via operating lease also known as contract hire.

What is a hire purchase?

A hire purchase agreement is a credit agreement between a business owner and a lender, who agree on a fixed monthly repayment schedule in return for the use of an asset, in this case, a commercial vehicle. It’s important to know that you do not own the item (off the balance sheet) until the final payment is made. The typical advance rental/deposit is 20% of the market value (VAT is normally paid upfront on commercial vehicles).

It’s worth noting the following:

  • Some hire purchase agreements have balloon payments at the end — these are normally a higher amount than the monthly repayment amount

  • You do not own the item until the final payment has been made, but you can still have full use of it throughout the scheduled repayment period

  • You can’t sell the item until the agreement has been paid in full

  • If you do not meet the agreed repayments, the item can be seized

  • You have the right to end the agreement at any time

What is a commercial vehicle finance lease?

A finance lease is a fixed rental lease where you dispose of the vehicle at the end of the agreement through an asset disposal process. You can enjoy the consistency of fixed monthly rentals with the choice to either extend the lease or buy the asset at the end of the contract. It’s worth noting the following:

  • Minimum one month's rental upfront, typically 3 month's rentals are required

  • New and used vehicles are allowed

  • VAT-registered businesses may be able to reclaim all or part of the VAT on monthly rentals

  • You may have to pay charges if you repay early, in full or in part, a fixed rate credit facility 

What is an operating lease?

Asset finance can be a bit confusing at first look, especially understanding the difference between a finance lease and an operating lease. An operating lease, in contrast to a finance lease, does not transfer all of the risks and rewards of ownership to the lessee. And, it will last less than the full useful life of the asset, so the lessor will expect the asset to have a resale value at the end of the lease period (residual value). Operating leases are used regularly with assets that have a relatively short lifespan in the business before it needs to be replaced or upgraded. The maintenance is usually handled by the lender and the lease period will be shorter than the lifetime of the item.

As the lender assumes the risk in terms of the residual value of the asset, this is priced into the contract. In contrast, if the asset will likely have a long useful life, then you as the business owner might be happy to assume this risk rather than paying a charge to the lender for bearing the risk. An airplane is a good example of an asset well suited to finance leasing, but a new car can equally have a long useful life including van leasing deals for pickup trucks.

Should I use an operating lease or a finance lease?

This is a question that every business owner will need to consider before deciding on a business contract hire. It might be helpful to consider the following:

  1. Do you want to keep the vehicle for the long-term, or upgrade it regularly?

  2. Are you ok with doing the maintenance and repairs yourself?

  3. Will you use the business car for most of its useful life?

  4. Do you want the asset to appear on your balance sheet?

Depending on how you answer these questions, you will be better suited as a limited company or sole trader to either a finance lease or an operating lease.

Choosing the right lender

A credit broker will help you find business loans by scanning the market and introducing you to different high street banks and lenders. This is different to a lending platform, which cuts out the middleman between lenders and business borrowers, by offering a website where both parties can connect, thus reducing costs on both sides. A broker not a lender with a registered office will charge a commission for finding you a credit facility including commercial vehicle leasing and hire purchase.

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