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Business finance lease guide


What is a business finance lease?

A business finance lease is a popular option for commercial vehicles where business contract hire is not suitable (cars can also be financed as well). It is great for businesses that require one or more vehicles and does not have the money to pay for the asset.

It is a tax efficient option where you choose to pay either the entire cost of the vehicle, including interest charges, over an agreed lease period or opt to pay lower monthly rentals with a final payment based on the anticipated resale value of the vehicle. The vehicle is registered in the lessor's name initially.

Road fund license after the first year is a cost which is re-invoiced to the customer, the vehicle remains in the name of the finance company.

A finance lease is different to that of contract hire, as you have to pay a balloon payment at the end of your leasing agreement. This balloon payment pays off the finance company's investment. The balloon payment figure is agreed at the beginning of the contract and is dependant on whether you want higher or lower monthly payments during your contract term.

How does the balloon payment work?

This very much depends on the setup of the agreement if you have opted to have a final rental payment or not. If a final rental has been setup this will become due and payable upon expiry of your contract. Should you wish to re-finance the final rental, we will need a minimum of 28 days notice prior to expiry of the contract original term.

All rentals are subject to VAT and as such should government legislation change, i.e. VAT rate currently 20%, these changes would be passed onto the customer.

Customers are able to claim 50% of the VAT on cars and 100% on commercial vehicles (subject to being VAT registered).

What happens at the end of the contract?

Once the contract term has come to an end, the vehicle is sold by the finance company to a third party. If the sold price is above the pre-determined balloon payment then you will receive a percentage refund of the proceeds. However, if the sale price of the vehicle is lower that the balloon payment, you will be liable to make a further payment to the finance company.

Key customer benefits

There are many reasons why a business finance lease may be suitable for your business. The key benefits are:

  • Our buying power helps you the customer benefit from low monthly rentals
  • Monthly rentals can be lowered further through the introduction of a balloon payment at the end of the contract. This can be set at a value equivalent to a forecasted residual value or reduce in line with anticipated wear and tear on the used value
  • Although the customer does not own the vehicle, they receive 98% of the sale proceeds. Where a balloon payment has been introduced, these proceeds are utilised to help clear the rental
  • Available option to re-finance the balloon payment over a longer period of time
  • You can gain access to new vehicles that would otherwise be too expensive to buy by your business
  • Sale proceeds can boost the equity in your business by receiving a percentage of the sale of the vehicle at the end of your contract term