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When the time comes to buy a new van it’s essential to find the most suitable way for your type of business to fund it. At the time of purchase there may or may not be some vantastic deals out there but there are certainly a number of different ways to pay for the new vehicle. And, perhaps somewhat surprisingly, the choice could come down to just how dirty your van is likely to get during its working day. The best way to fund a new van which will be used by a builder or plasterer – and so tends to take a bashing – is usually different to the best way to fund one used in cleaner trades, like plumbing or by electricians.

So if you can guarantee the condition of your vehicle and are VAT registered contract hire is a suitable option.

But if your new van is less likely to stay pristine finance lease could be the way forward.

Here we look at both options and other choices of van funding:

Contract Hire

Contract Hire, which is sometimes referred to as an Operating Lease, is a long term rental agreement of 12- 60 months which you can have with or without maintenance.

It‘s popular with VAT registered companies as they can generally claim back 100 % of the VAT on the finance element for commercials (subject to no private use, no exempt turnover and not being on the Flat Rate VAT Scheme).

Without maintenance schemes are cheaper on the face of it, but don’t forget you are going to have to pay for all the servicing and repair costs. And be warned, any damage that’s not considered fair wear and tear can lead to expensive penalties.

If you include maintenance in the package it’s more straightforward as you simply pay an initial deposit of around three months rental and then a fixed monthly fee.

And with this type of contract the VAT on the service element is 100% recoverable. At the end of the contract you simply hand the van back and get a new one to replace it, but again make sure it’s in good condition or you could face penalties.

Contract Hire is generally ‘off balance sheet funding’ which means it can improve your gearing ratio (assets to borrowing ratio) and therefore possibly your borrowing ability in the future.

Other advantages include: No vehicle disposal problems; Reduced administration; Optional replacement vehicle cover in case your van breaks down.

Disadvantages include: You will never own the vehicle and there is no option to buy; Early termination can be expensive; If your van does more miles than agreed in the contract you will be charged excess mileage.

Finance Lease

Finance lease is popular with van operators and comes with all the benefits of outright ownership, but many of the cash flow and VAT advantages of contract hire and so is seen as a good compromise between the two.

Just like contract hire you pay a deposit followed by fixed monthly payments.

You have a choice of either going for lower monthly payments followed by a large payment at the end of the lease – the balloon payment – which is normally covered by the sale of the van, or paying more each month and then getting back up to 95 per cent of the price the van is sold for in the form of a rebate from the rental company.

If you opt for the second choice and, at the end of the agreement, think there is still plenty of mileage left in the van you can always enter into a secondary rental period, often called a peppercorn rental as it costs very little.

Finance lease is a very popular choice for VAT registered companies as they can generally claim back 100% of the VAT on commercial vehicles (subject to no private use).

Advantages include: Minimum capital expenditure; Accurate monthly budgeting; A fixed interest rate is available on some contracts; No damage recharge as you are responsible for disposal of the vehicle; Reduced administration; Optional replacement vehicle cover in event of breakdown

Disadvantages: You will never own the vehicle as the vehicle must be sold to a third party as the end of the agreement; Operating risk associated with the vehicle; Interest rates can vary on some contracts; You must have fully comprehensive vehicle insurance.

Hire Purchase

Hire purchase is a term everyone is familiar with and basically means you agree to buy the vehicle over a set period, normally three years, by paying agreed monthly installments.

When you make the last payment the van is yours to carry on using or sell on. Stating the obvious you are responsible for its maintenance as well as road tax (VED) while making the hire purchase payments.

The tax man treats hire purchase as a deferred purchase agreement rather than a hire agreement so for corporation tax purposes the van is deemed to belong to you from delivery, so you can claim capital allowances as if you had paid for it in full on delivery.

Advantages: A very simple method of finance; You can obtain capital allowances from the date of delivery; It does not suffer a partial lease rental tax disallowance

Disadvantages: It’s an on balance sheet form of finance; There is no guarantee of the value of the vehicle at the end of the agreement; All the VAT element of the  purchase must be paid up front

Contract Purchase

Contract Purchase is for business customers looking to fund a new vehicle in a manageable way. A little like hire purchase. The monthly payments are not subject to VAT, but if you do take out the optional service package you will have to pay VAT on the service costs. This type of funding is ideal for businesses that would like options at the end of its finance agreement.

Customers make an initial payment when they first take out the contract, then pay fixed monthly payments and finally have an Optional Final Payment at the end of the contract. You can keep the van by making this final payment, trade-in your vehicle at a dealership and take another vehicle from them or simply return the vehicle to the funder.

Advantages: Low initial payment; Fixed monthly payments; No depreciation concerns if you want to walk away at the end; Maintenance and servicing can be included; Cost effective

Disadvantages: You must have fully comprehensive vehicle insurance

Lease Purchase

The main difference between Lease Purchase and Contract Purchase is that with Lease Purchase you enter into an agreement to buy the van at the end of the contract while with Contract Purchase you have the choice to buy or not.

Lease Purchase normally lasts 2-4 years and is for people who would like to own a vehicle but don’t  have the money to buy one immediately. It’s ideal for non VAT registered customer who eventually wants to own the van they are buying.

You have the flexibility of putting down a larger initial payment to reduce the monthly payments. which are worked out on the difference between the cost of the vehicle and the depreciation value plus interest.

Advantages: Monthly payments are not subject to VAT; The vehicle will become a company asset; Lease Purchase frees up finance for other aspects of your company; Low initial payment.

Disadvantages: In some cases the larger final payment can be larger than the value of the van; No maintenance included.

Original article from : http://www.businessvans.co.uk