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Guide to financing your fleet – what are the options?

If you're looking to finance new vehicles in your fleet, it can be difficult knowing where to start. Here, we break down the options.
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Financing your fleet shouldn’t be a headache. With this handy jargon buster, you can find the right form of fleet finance for your business.

Whether investing in a new vehicle, or looking to scale up an existing fleet, one of the first questions you need to ask yourself is how you will go about financing your fleet.

There are so many different ways to finance vehicles that it can seem a bit intimidating. The best advice, if you are unsure, would always be to speak to your accountant about it. However, to get started, here’s an overview of the different options available to you.

Outright purchase

If you have the money, you can just buy the vehicles outright – no loans from the bank, no complicated financial jargon. You hand over the money and the vehicle is yours.

However, although this might be the simplest answer, it’s not necessarily right for everyone, even if you have the money. Once you buy it, the car is yours.

Do you need it forever, or for a fixed period? If you are likely to need to trade in your vehicle in the near-future, you may be better off with a contract hire – otherwise, you’re left with the admin involved in selling it on, or worse, being lumbered with a depreciating asset you don’t need.

Financing your fleet: Contract hire/ Contract purchase

Under a contract hire agreement, you pay monthly instalments for the control of the vehicle, but never take ownership. The costs are calculated by taking the upfront cost of the car, minus the cost of the car at the end of the contract, factoring in depreciation.

Contract purchase is a similar arrangement, but it includes an optional “balloon payment” at the end of the contract where you can take full ownership of the car. This option is often more expensive, but offers increased flexibility.

Financing your fleet: Hire purchase

If you know straight away that you want to take full ownership of the car at the end of the agreement, a hire purchase may be your best bet.

You pay an upfront deposit, and the rest of the value of the asset is paid in monthly instalments. As soon as you’ve paid it off, the car is yours.

Interest rates are decided by your credit rating, so it is worth shopping around to find the best deal.

Financing your fleet: Leasing

Leasing is very similar to contract hire – you basically pay a fixed fee to rent the car.

Leasing can be very cost effective – your monthly payments are calculated as the original cost of the car minus the cost at the end. You essentially only pay for depreciation of the asset during the time it is in your control, so luxury cars are often a favourite as they hold their value better.

Red Driving School has a fleet of around 900 cars in total as part of a lease arrangement.

“Our fleet is on lease to us from six different finance companies. This cost is then incorporated within the franchise fee paid by our Driving Instructors each month,” explained Ian McIntosh, CEO.

“We made sure that we took the time to examine vehicle servicing costs. We examined various scenarios and common damages on a car and compared it the repair cost with suppliers. Additionally, when our cars go back to the supplier at the end of the lease, it must be repaired to BVLRA standard. When we start working with a supplier, we make sure that we understand how they work to the standard, because our cars do go back with a fair amount of wear and tear.”

Financing your fleet: Salary sacrifice

Salary sacrifices allow employees to exchange part of their salary for a non-cash benefit-in-kind. Both the company and the employee can make a tax saving on a salary sacrifice scheme as the benefit is taxed at a lower rate.

In addition, further tax breaks are on offer for lower emissions vehicles.

Financing your fleet: Combination financing

It is possible to use any one or a combination of these methods to finance your fleet. Handyman provider, Fantastic Services, is one such company employing this combination method. Rune Sovndahl, CEO and co-founder, explained: “It is a rather complex plan strategy-wise. Some of the fleet is funded through the bank, around 15-20 per cent of our fleet. Another hefty 30 per cent of the entire fleet is on contract hire with a vehicle-providing company. The rest of the vehicles are owned by the franchisees or their subcontractors.

“Of course, we support our employees and franchisees the best way possible and we see their growth as part of our company’s growth.”

There are plenty of options out there – we’ve just scratched the surface here. As with anything, research is required before you commit to anything.

Key questions to ask yourself: how will you use this vehicle? Does it need to be in your ownership or just your control? Can you afford the monthly repayments?

Once you have resolved all of these questions, you should be on your way to selecting the right type of finance for your business.

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About Author

Letitia Booty

Letitia Booty is a special projects journalist for Real Business. She has a BA in english literature from the University of East Anglia, and since graduating she has written for a variety of trade titles. Most recently, she was a reporter at SME magazine.

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