A Finance Lease is a popular vehicle funding option for businesses, particularly for vans and commercial vehicles. It allows you to use a vehicle for a fixed monthly rental over an agreed contract term while spreading the cost over time.
Unlike some other finance options, VAT is applied to the monthly rentals rather than the full purchase price of the vehicle upfront, which can help with cash flow.
At the end of the primary lease period, a final rental (often referred to as a balloon payment) is due. This amount represents the estimated residual value of the vehicle based on the expected mileage and contract term.
You are responsible for arranging the sale of the vehicle at the end of the agreement. If the vehicle sells for more than the final rental, you retain the majority of the surplus value (less a small administration fee from the leasing company). If it sells for less than the final rental, you will need to cover the shortfall.
Fixed monthly payments
Finance Lease agreements offer fixed monthly rentals, making it easier to plan and manage business expenses.
Flexible contract terms
Contract lengths typically range from 24 to 60 months, allowing businesses to choose a term that suits their operational needs.
Potential VAT advantages
For commercial vehicles such as vans (generally those with a payload of over 1,000kg), up to 100% of the VAT on monthly rentals may be reclaimable, subject to your business’s VAT status.
Lower monthly payments with a balloon rental
Monthly rentals can be reduced by including a final rental (balloon) based on the vehicle’s estimated future value.
Potential to retain equity
If the vehicle is sold for more than the agreed final rental at the end of the contract, you can retain the majority of the additional value.
Option to continue using the vehicle
In many cases, you can continue using the vehicle after the primary lease period, usually for a small ongoing rental.
Additional funding line
Finance Lease can provide an alternative source of funding that may sit outside your core banking facilities.
Early settlement option
Most agreements allow you to settle the finance early if your business circumstances change.
Balance sheet asset
The vehicle normally appears as an asset on your company’s balance sheet.
No requirement to be VAT registered
Businesses do not need to be VAT registered to use a Finance Lease agreement.
No strict mileage limits
Unlike some leasing products, Finance Lease agreements generally do not impose strict mileage restrictions, although higher mileage will affect the vehicle’s resale value.
Responsibility for vehicle disposal
At the end of the agreement you are responsible for arranging the sale of the vehicle.
Risk of shortfall on resale
If the vehicle sells for less than the agreed final rental (balloon), you will need to cover the difference.
Vehicle value affected by usage
Although there are no strict mileage or damage penalties, excessive mileage or poor condition can reduce the vehicle’s resale value.
Final rental payment due
A final balloon rental will be due at the end of the primary lease period unless it is refinanced or covered by the vehicle sale proceeds.