Business vehicle finance

When first looking to purchase a business vehicle, the different types of loans, conditions and industry terms can be confusing, if not intimidating.

Read our introductory guide below so you can confidently speak to your broker with an understanding of what you want and what would suit your business.

First of all though, let’s make clear the meaning of one of the most common terms used, “residual value”. This means that part of the value of a vehicle is not included in the loan and becomes due at the end of the finance period.

It is advantageous in that it allows you to lower the cost of your monthly payments. However, it is important to consider what you will do regarding this outstanding payment at the end of your contract. Options include trading in the vehicle, refinancing the residual amount or continuing the lease.

Now let’s look at the choice of business financing you have available when you are looking to purchase a vehicle.

Finance Lease

A finance lease is sometimes known as a “lease to own”. It is similar to an operating lease except the benefits and associated risks of owning the vehicle lie with the person/business taking out the lease.

Furthermore, with finance leases, a residual value is imposed so when your contract with the finance company ends, you will still have a financial obligation and will need to make a final payment whether through trading in the vehicle, refinancing or another method. Your broker will discuss the best level of residual value to impose on your contract.

Finance leases are a great choice if you need to regularly update your vehicles at fixed intervals.

The benefits of finance leases include:

• The vehicle is used as security
• Flexible leasing periods are available varying from 1 to 5 years
• GST is spread throughout the lease period improving affordability
• Flexible accounting methods

Operating Lease

An operating lease means you don’t own the vehicle but do have full use of it. Each month you pay the finance company to lease the vehicle for a fixed price.

At the end of the lease agreement, you can simply return the vehicle in a good condition and there are no further financial obligations for you to meet as ownership has been retained by the lease provider.

If you are a business that is looking to use the vehicle to make an income, then an operating lease can be a good option as it’s possible to include all its maintenance as well as registration and WOF fees.

There are numerous benefits of an operating lease including:

• Flexible leasing periods varying from 1 to 5 years
• Knowing all of your monthly costs for the vehicle, except insurance, in advance
• Payments are a tax-deductible business expense
• Lower capital costs of running a fleet
• The lease provider retains ownership of the vehicles and the associated risks of ownership such as depreciation
• Businesses can determine the distance travelled allowance to suit their needs.

Commercial Hire Purchase (Term Loan)

Hire Purchase varies from Operating Lease and Finance Lease as you are the owner of the vehicle and is therefore noted on the company’s balance sheet.

With this method, the finance company provides the finances for you to purchase the vehicle and then they load a security against it. You make fixed monthly payments to the financiers and then once all payments have been made, the security is removed and you get a clear title to the vehicle.

Advantages of commercial hire purchase include:

• Flexible range of contract lengths covering 1 to 5 years
• A balloon payment at the end of the contract can be added, reducing monthly payments
• A deposit can also be put down on the vehicle further reducing monthly costs
• Your monthly payments are fixed so you know costs in advance
• Interest is a tax-deductible business expense
• You own your vehicle from the start

A chattel mortgage is most suitable for those businesses that use the cash method for their accounting.

These three options offer you a variety of ways in which to finance vehicles through your business and it will depend on your business and circumstances which offers you the best value. To find out more and discuss which option is best for you, get in touch with us on  0800 300 500 or email info@creditone.co.nz so we can give you a helping hand.