A variety of businesses may require vehicles for a host of different reasons. Whether you’re in logistics or not, access to vehicles may be crucial to the successful running of your enterprise.
However, acquiring ownership over a fleet of vehicles, or even a single one, could prove to be a restraint on your company’s cash flow.
Thankfully there is a range of business vehicle finance options available to make access to this essential asset easier. In this article, we will discuss the main types of vehicle finance, their strengths and weaknesses, how you can acquire them, and which option is best for you.
What Is Commercial Vehicle Finance?
Commercial vehicle finance is a loan extended by a bank or other finance provider that can be used towards any vehicle a company may require to run their business. The loan will entail a variety of conditions, and the borrower must provide the documentation requested by the lender.
How Can I Get Commercial Vehicle Finance?
Commercial vehicle finance can be acquired via a standard loan from a bank or alternative loan provider. A finance lease arrangement can also be arranged with specialised vehicle finance lenders.
A bank loan will entail stricter, extended checks on your financials and credit record, as well as in-person meetings. The alternative loan providers and vehicle lessor options may also entail checks but will be more forgiving and can generally be completed online or over the phone.
Types of Financing Options for Commercial Vehicles
Commercial vehicle loan
What is a commercial vehicle loan?
This is a basic loan agreement between you and a bank, or alternative lessor, where a lump sum is borrowed up-front to be spent on vehicles.
How does a commercial vehicle loan work?
A commercial vehicle loan is similar to a standard loan in most ways in that you receive a sum upfront which you pay back with interest. However, the loan is usually leveraged against the vehicle you intend to purchase with the financing.
These loans generally have a term of 1-5 years.
A bank will require extensive paperwork to prove your reliability, including credit reports, tax returns and cash flow projections. An alternative lender will generally require fewer documents to complete their checks.
How much does a commercial vehicle loan cost?
The cost of the loan will depend entirely on the amount of money you choose to borrow plus the interest rate in the agreement.
Some loan agreements do not require a deposit; if so, this may incur a higher interest rate (7%-19%).
The pros and cons of commercial vehicle loans
Pros:
- Flexibility over the choice of how you spend your loan. A bank loan may entail tighter restrictions, but either way, the loan will enable you to buy your desired vehicle/s immediately.
- Fixed return rates, which usually entail no hidden fees.
- Agreeable terms of returns between 1-5 years.
Cons:
- Strict requirements from banks may prohibit you from acquiring a traditional loan and mean you have to borrow from an alternative lender with higher interest rates.
- There is a risk that once you have paid off the loan, your vehicle may no longer be useful to you or have become obsolete.
Hire purchase
What is hire purchase?
With this form of asset finance, your business will hire a vehicle from a finance company and will have the opportunity to purchase it outright at the end of the hire purchase agreement.
How does hire purchase work?
The borrower will make a deposit, typically at their own discretion, and then cover any upfront costs. Upon completion, the borrower will then have full access to the vehicle/s.
The borrower will be liable for the maintenance/insurance of the asset and make fixed repayments over the agreed term. After the final payment, or “balloon payment”, is made, the ownership is transferred to the borrower.
How much does hire purchase cost?
Hire purchase will cost the amount of the vehicle/s in the agreement, plus the interest rate. The terms of hire purchase usually last for 1-5 years.
If you choose to pay a larger deposit at the beginning of your term, you may reduce the cost of your monthly payments and interest rates. A good credit score will mean lower interest rates, around 2.5%-4%, and a lower credit score will mean a higher rate, 5%-8%, and potentially more if your score is lower.
The pros and cons of hire purchase
Pros:
- You won’t need to spend savings or take a chunk out of your cash flow upfront but instead spread the cost over 1-5 years to acquire your vehicle/s.
- This is an easy form of asset finance to obtain and is a straightforward method of financing with fixed rates and terms of return.
- It gives easier access to modern, competitive vehicles.
Cons:
- By the end of the term, you will have paid more for your asset/s than you would have done had you paid upfront due to the interest charged.
- If you default on the terms of your agreement, the lessor will have the right to seize the vehicle/s from you.
- As well as paying interest on your monthly payments, you will also have to pay for the vehicles’ maintenance and insurance even before the final payment when you become the legal owner.
Contract hire
What is contract hire?
In this form of business car finance, you or your company will hire a vehicle from a finance company. You will pay a fixed amount and may have to stick to pre-arranged agreements such as mileage restrictions.
How does contract hire work?
In a contract hire agreement, you will rent a vehicle for a fixed period at a fixed monthly rate from a lender.
The lender retains the responsibility of the vehicle and the risks that ownership entails. At the end of the agreement, the borrower returns the car or van to the lender.
How much does contract hire cost?
The cost of contract hire will depend on a few variables. Firstly the number and quality of vehicles will determine the grounds of the contract.
The mileage agreement will contribute towards the cost; the higher the mileage, the higher the monthly payments. Going over the agreed mileage will incur excess mileage charges, so it’s important not to underestimate how much you will use the vehicle/s.
If you take a longer contract out, this generally means that your monthly payments will be less, though this is not always the case.
Finally, your upfront deposit will reduce your monthly payment.
The pros and cons of contract hire
Pros:
- The repayments are generally low, and the fixed monthly rentals will remain the same for the duration.
- Contract hire always offers flexible mileage and duration combinations, so if you have unique or short-term demands this form of business car finance will be able to cater to your requirements.
- Contract hire is VAT deductible, so it’s a great option for VAT companies. 50% of tax can be claimed back on vehicle rentals and 100% on van rentals. 100% of the VAT on maintenance costs can be reclaimed as well.
Cons:
- Excess mileage charges, charged on a pence per mile basis, can add up quickly if you go over the agreed mileage.
- You will not own the vehicle, nor will you have the opportunity to buy it at the end. So convenient as this agreement is, it is temporary by definition.
- As you are not the owner of the vehicle, you must take extra care to maintain its condition within the BVRLA’s (British Vehicle Rental and Leasing Association) Fair Wear and Tear guidelines. If you do not, you will incur repair charges.
Do I Qualify for Commercial Vehicle Finance?
Commercial vehicle loan
If you are applying for a loan from your bank, you will need to satisfy their loan application requirements which may prohibit some smaller businesses from gaining access to them. This will include consumer credit, trailing financials, proof of profitability, and projected plans for future earnings.
If seeking a loan from an alternative finance company, you are much more likely to be afforded a business car finance lease. Some companies will only require a credit check for this option.
Hire purchase
This is a very easy form of car finance to attain and generally hinges on your age and whether you have a full driving licence. You will also generally be required to perform a soft credit check which won’t affect your credit score.
Contract hire
Contract hire requires traditional business vehicle finance checks to be performed and various boxes to be checked but are not a restrictive form of asset finance.
These requirements may include, but are not limited to, your business having a positive net worth, a minimum of two years of trading, a full driving license, and being a registered sole trader, limited company, or partnership.
How to Apply for Business Vehicle Finance
A bank loan requires a more involved application process that may involve you having to have a sit-down meeting with your bank’s loan specialist, where you will present your application and paperwork.
The other forms of finance lease listed above can be acquired more easily, either online via simple application forms, through an exchange of emails, or over the phone.
Types of Commercial Vehicles You Can Get With Financing
Specialised vehicle finance companies are not a lender and will have a host of vehicles in their fleet for you to borrow. If you decide to take a loan out, you will not be limited in terms of what you can purchase. Vehicles you can lease include –
- HGVs
- Cars
- Buses/coaches
- Tractors
- Vans
Can I Get Financing for Commercial Vehicles If I Have a Bad Credit Rating?
A traditional loan may be difficult to acquire from a bank, but an alternative finance company will be more agreeable if you have a low credit rating.
If you choose to lease a vehicle, you will be borrowing from a vehicle financing company, and not a lender who will be more forgiving of a low credit score as the assets borrowed will count as collateral against your agreement.
How to Compare Commercial Vehicle Finance Options
There is a range of comparison websites available to ensure you get the best quote for your precise financing needs can easily found via a simple Google search. Be sure to compare the key benefits of each product before choosing one to use to purchase your new vehicle.
Who Offers Commercial Vehicle Finance
Commercial vehicle finance is available from various general and specialised lessors and car finance providers.
Whatever your specific requirements are, there will be a finance plan for you.
Final Thoughts
Buying the assets that are necessary to the day-to-day running of your company can be a difficult financial constraint on your business. Your requirements may only be temporary, and having to buy a vehicle for a short-term purpose would be overkill.
Thankfully with the range of finance options we have covered in this article, it’s clear that there is an entire market to help business owners get whatever vehicle they need for the short or long term. You can rent or enjoy full ownership without your finances taking a hit.
FAQs
How long can you finance a commercial vehicle?
Finance options generally range from 1-5 years, but some agreements can reach up to 10 years.
Will I have to pass a credit check to get a commercial vehicle finance lease?
Most application processes require a credit check. For a bank, it will be a full credit check but for some, like alternative loans or asset leasing agreements, it may only be a soft credit check with no impact on your score.
Can VAT be claimed on commercial vehicles?
If you choose contract hire, 50% of car VAT can be claimed back, 100% on vans, and 100% of maintenance costs, making it a great option for VAT-registered companies.
How soon can I receive my commercial vehicle loan?
A bank may take up to two weeks to fund your loan application, while some alternative loans can take as little as 2-5 business days.