Flexibility is one of the keys to success for any business, large or small. If your business requires one or more vehicles but does not have the finance to pay for the assets, then a car finance lease could be the solution. It's an alternative to hire purchase with more freedom but just how does a finance lease work and is it right for your business?
A finance lease is a VAT-free method of financing a vehicle that is usually accessed by VAT-registered businesses and companies. It is offered to businesses where a moveable asset (the vehicle) is purchased from a supplier - your business can then use this asset while paying an effective rental rather than a repayment.
The monthly rental is determined by the initial cost of the vehicle, the period of the finance lease and the residual value - that is the estimated future value of the vehicle at the end of the finance lease period once depreciation is taken into account. As a residual value is used to calculate your monthly rental, most finance lease companies will insist that you stick to a strict mileage limit as this mileage restriction is used to determine the future value.
You have full use of the vehicle during the finance lease period. Although you never take ownership, at the end of the finance lease contract a payment equivalent to the residual value is payable. Usually this means that the vehicle is sold and a proportion of the proceeds of the sale are returned to the lessee. Alternatively you could choose to pay the entire cost of the vehicle (plus interest) in monthly instalments.
Some finance lease companies may offer you the chance to extend the finance lease with a secondary rental.
There are numerous benefits to acquiring a finance lease. These include:
There are disadvantages to finance leases too. Primarily these are that you will never take ownership of the vehicle as the car or van must be sold to a third party.
Furthermore, interest rates can vary steeply from company to company and unless you're savvy you could pay out much more than you need to. Be prepared to shop around for the best deals. Also watch out for unexpected fees including documentation fees, which are paid at the outset and additional charges from the finance lease company.
A finance lease removes the pressures of heavy initial outlays. It is a proven method of giving your business access to the latest vehicles without actually having to take ownership and buy them outright. There are also tax benefits too, which make this an ideal car finance method for many businesses.
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