Funding Methods

Buying a car used to be a simple matter of visiting a dealer with a cheque book in hand, and coming away with the car you liked.

Today, there is a range of financial products available to the business buyer to acquire a new car. There is no one size fits all solution. Don't worry - our sales team will be able to guide you through the process, and help you decide which option is best for your particular needs.

Cash Purchase

If a company's finances are very healthy, and the business is cash-rich, then an outright purchase may be the best solution. The car will appear in the company's balance sheet, and will be depreciated over time in accordance with the relevant accounting policies. For a VAT registered company, the INPUT VAT on the purchase price of a new or qualifying car may be reclaimed ONLY IF THE CAR IS USED EXCLUSIVELY FOR BUSINESS USE. In the case of a company car being available for both business and personal use, the input VAT may not be reclaimed.

To qualify as being exclusively available for business use, a car must only be used for business journeys, and not 'made available' for private use (e.g journeys to / from place of work).

  • INPUT VAT CAN BE RE-CLAIMED ON 100% BUSINESS USE ONLY CARS
  • APPEARS IN FIXED ASSETS OF COMPANY
  • DEPRECIATION MAY BE CHARGED AGAINST PROFIT
  • YOU CHOOSE WHEN TO DISPOSE OF VEHICLE
  • CAPITAL ALLOWANCE OF UP TO 100% IN YEAR 1 (PERCENTAGE DEPENDENT UPON CO2 EMMISIONS OF CAR)
  • NO MILEAGE LIMITS
  • CASH TIED UP
  • BURDEN OF DEPRECIATION TO BEAR
  • DISPOSAL AND AFFILIATED COSTS

Contract Hire

Sometimes referred to as leasing, contract hire is one of the most common forms of acquiring a car for a business. Under a leasing agreement, you never own the vehicle, you essentially sign a long-term rental agreement, offering exclusive use of a car (usually between two and four years), at a fixed monthly price. A lease contract will be based on a fixed mileage limit, agreed at the onset, with any excess mileage charged on a per-mile basis. At the end of the contract, you simply hand the car back to the lease company.

A contract hire agreement may be either on a maintained or non-maintained basis. A maintained contract hire payment will include the cost of all regular maintenance costs, including tyres, whereas the hirer will be responsible for all maintenance under a non-maintained contract.

A contract hire company will require an 'up front' payment of an amount equal to 3,6,9 or 12 months' rental in advance, whichever suits the hirer best, however the total amount payable over the duration of the contract is normally the same in all cases.

Broadly speaking, where there is no private use, 100% of the input VAT on both the rental and maintenance element of the payment can be reclaimed. Where private use is allowed, 50% of the input VAT on the rental element and 100% of the Input VAT on the maintenance element may be reclaimed (where CO2 is over 130g/km, different rules apply).

A contract hire agreement is classified as 'off balance sheet financing' - the car will not appear in the assets of the company.

  • DOES NOT TIE UP COMPANY BUSINESS CAPITAL
  • AN ADDITIONAL FUNDING LINE - i.e. DOES NOT TIE UP OVERDRAFT FACILITY
  • FIXED PAYMENTS
  • NO NEED TO WORRY ABOUT DEPRECIATION
  • NO NEED TO WORRY ABOUT DISPOSAL
  • OFF-BALANCE SHEET FINANCING, IMPROVING THE LIQUIDITY RATIO, GEARING AND RETURN ON ASSETS
  • RE-CLAIM VAT (OR PROPORTION OF) ON RENTAL PAYMENTS
  • CAR DOES NOT BELONG TO YOU AT THE END OF THE CONTRACT
  • NEED TO BE CAREFUL IN ESTIMATING MILEAGE
  • COSTLY TO COME OUT OF THE CAR BEFORE THE END OF THE CONTRACT IF CIRCUMSTANCES OR NEEDS CHANGE

Hire Purchase

1. Cars with Co2 of 130g/km or more attract a 15% disallowance on the finance element of a lease rental.

  • NO MILEAGE RESTRICTION
  • YOU WILL OWN THE CAR AT THE END OF THE CONTRACT
  • CAR MAY BE CHANGED PRIOR TO THE NATURAL END OF THE CONTRACT (SUBJECT TO SETTLEMENT OF THE BALANCE OF FINANCE)
  • FIXED PAYMENTS
  • CAPITAL ALLOWANCE OF UP TO 100% IN YEAR 1 (PERCENTAGE DEPENDENT UPON CO2 EMMISIONS OF CAR)
  • INPUT VAT ON PURCHASE PRICE CAN BE RE-CLAIMED ON BUSINESS ONLY CARS
  • APPEARS IN FIXED ASSETS OF COMPANY
  • DEPRECIATION MAY BE CHARGED AGAINST PROFIT
  • HIGHER MONTHLY PAYMENTS THAN PCP / LEASE
  • BURDEN OF DEPRECIATION TO BEAR
  • DISPOSAL AND AFFILIATED COSTS

Personal Contract Hire (PCP)

Primarily aimed at the private user, a Personal Contract Purchase (PCP) may be suitable for your particular business.

The ongoing monthly costs are less than a Hire Purchase, since the instalments you are making cover the estimated depreciation and any interest costs only. At the end of the contract there will be a balloon payment, known as the Guaranteed Minimum Future Value (GMFV). This is the GUARANTEED future value of the car at the end of the contract, subject to the car being in good condition, the car being serviced at the appropriate times in accordance with manufacturer service intervals, and the car being within the mileage agreed in the contract. In essence you are paying the difference between the purchase price (less deposit) and the GMFV, plus interest.

At the end of a PCP agreement, you may either

  1. Return the car to the finance company and walk away. If the market value of the car is less than the GMFV - NO PROBLEM ! - just return the car.
  2. Settle the amount outstanding (GMFV) and keep the car (or re-finance the GMFV amount)
  3. Part exchange the car for a new one. In this case, we the car supplier would settle the outstanding GMFV, allowing you to use any equity there may be in the car towards a new car / PCP contract.

The monthly cost is determined by :

  1. Price of car
  2. Amount of deposit (which is flexible, according to your circumstances, from zero to 40%)
  3. Mileage
  4. Period of agreement
  5. Guaranteed Minimum Future Value (GMFV)
  • AN ADDITIONAL FUNDING LINE - i.e. DOES NOT TIE UP OVERDRAFT FACILITY
  • FIXED PAYMENTS
  • MONTHLY PAYMENTS SIGNIFICANTLY LESS THAN HIRE PURCHASE
  • GUARANTEED FUTURE VALUE - NO NEED TO WORRY ABOUT DEPRECIATION
  • FLEXIBLE OPTIONS AT END OF CONTRACT
  • CAPITAL ALLOWANCE OF UP TO 100% IN YEAR 1 AGAINST PROFIT (PERCENTAGE DEPENDENT UPON CO2 EMMISIONS OF CAR)
  • CAR MAY BE CHANGED PRIOR TO THE NATURAL END OF THE CONTRACT (SUBJECT TO SETTLEMENT OF THE BALANCE OF FINANCE)
  • NO RISK OF NEGATIVE EQUITY
  • NEED TO BE CAREFUL IN ESTIMATING MILEAGE
  • MONTHLY PAYMENTS NOT SUBJECT TO VAT

Lease Purchase

A Lease / Purchase agreement is pretty much the same as a PCP agreement, WITHOUT the possibility of returning the car to the finance company at the end of the contract. The outstanding balloon payment will have to paid, which is when title transfers to the user, or the car may be used in part exchange, where the dealer will offer an amount for the car, and out of this amount, will settle any outstanding finance. It is possible end up in a position of negative equity under a lease purchase agreement, since the value of the car is not guaranteed at the agreement end date.

Broadly speaking, whether the car is acquired by outright purchase, HP, PCP or Lease Purchase, the car will appear as an asset in the business balance sheet and should be treated accordingly.