What is Finance Lease?
Finance Lease is an agreement for businesses needing vehicles for which Contract Hire is not suitable. It offers flexibility and tax advantages to eligible companies which require one or more vehicles but don't have the accessible funds to pay for them upfront.
What are the benefits of Finance Lease?
- Fixed-rate, fixed-term finance — both the interest rate and the length of the agreement are fixed at the start, so you know exactly how much you will be paying each month.
- VAT benefits — VAT-registered businesses can claim back 50% of the VAT on the rental on a car, and 100% on a commercial vehicle. If you opt to include maintenance, you can always reclaim 100% of the VAT on the maintenance payment, car or commercial. Different rules may apply to businesses on non-standard VAT schemes, such as cash accounting or the flat-rate scheme — you'll know if this applies to your business.
- Flexible — payments are structured to match your company's cash flow.
- Low up-front costs — for just a small initial outlay (and sometimes even with no initial payment), you can use the assets immediately.
- No penalty charges — because the vehicle does not return to the finance company at the end of the contract, there are no charges for damage or excess mileage.
How does Finance Lease work?
At the outset of a Finance Lease agreement, you select the term and final payment (also called a "balloon payment") for the vehicle. This will give you a fixed monthly cost, which can help with budgeting and cash flow.
Your business will be able to use the vehicle without facing the high upfront cost of purchase, handle the administration of the vehicle, and have the assets show on your company's balance sheet.
At the end of the contract, you have the option to pay the balloon, or sell the vehicle to a third party, allowing your company to benefit from any available equity if it is sold for profit.
Things to note with Finance Lease
Although there are no penalty charges for damage and excess mileage, these are factors which will affect the final value of your vehicle when it comes to the end of the contract.
If you opt for a high final payment (a "balloon payment"), you must be sure you can afford to pay it at the end of the contract, as it is not optional. In some cases, the balloon payment may end up being more than the vehicle's value.
If the sale price of the vehicle is below the agreed balloon, you will be liable to the finance company for the shortfall.