Asset finance – the flexible option for business growth
Head of Asset Finance | Finance & Leasing Association
Leasing commercial vehicles or buying through hire purchase makes good business sense, and the latest figures from the Finance & Leasing Association (FLA) bear this out.
In the ten months to October 2014, the finance extended to customers for this kind of asset grew by 18%, compared with the same period last year – and during the month of October 2014, it was up by 28%.
That means our members wrote £611 million worth of contracts with businesses that wanted either to lease extra transport or delivery capabilities, or to buy the vehicles without the large one-off payment needed for an outright purchase.
Whatever the scenario, leasing and hire purchase had the flexibility to help those businesses manage their capital investment – and the 96% approval rate for asset finance applications means the option is available for virtually every business that wants to grow.
The way leasing works is that the leasing company (lessor) buys and owns the vehicle on behalf of the customer (lessee). The customer then pays rental for the use of the vehicle over a pre-determined period.
There are two different kinds of lease – operating and finance. The general difference between them is that an operating lease would tend to be used if the customer only needed the equipment for a certain period rather than its entire working life, whereas under a finance lease, the full value of the item would be paid over the lease period.
For commercial vehicles, operating leases have the advantage of shorter agreement periods which are better suited to the ebb and flow of business demands. Payments (which appear in the customer’s profit and loss account) are made to the lessor for the use of the equipment while it is needed. As the lessee only keeps the asset for a limited period, it is not shown on the customer’s balance sheet.
VAT is recoverable on the rental payments for commercial vehicles. Therefore, a fully taxable business may recover up to 100% of the VAT charged under the agreement. But it is advisable to consult your accountant to determine what proportion, if any, will be deducted for private mileage.
Under an operating lease, the vehicles will not appear on your balance sheet, so there is no risk of having to anticipate depreciation costs, as these are calculated by the finance company in determining the monthly rental. This also helps with forecasting tax liability. For businesses with larger fleets there are economies of scale to be had.
By contrast, under a finance lease the value of the asset appears in the lessee’s balance sheet and the interest element of the rentals pass through the profit and loss account as expense items. As finance lease agreements generally run for longer periods, the full value of the vehicle will be repaid to the lessor, plus interest, over the duration of the agreement.
If you wish to keep your vehicles as a business asset, then Hire Purchase (HP) may be the best option. The finance company purchases the asset on behalf of the customer and will retain ownership until the final instalment is paid, at which point the customer will be given the option to buy it for a nominal sum. Again, it is advisable to check with your accountant to make sure that this is the right solution for your business.
Posted on: January 20th 2015