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A guide to vehicle funding

Submitted by RianaDing on Sat, 06/09/2018 - 13:02
Vehicle funding options

What are my vehicle funding options?

An operating lease is one of the most commonly used methods of sourcing business vehicles, but there are other financing options that may better suit your organisation’s needs. 

Here’s a handy rundown on the methods you can use to fund your fleet: 

  • Operating lease
  • Finance lease
  • Sale and leaseback
  • Outright purchase

Operating lease

A fully-maintained operating lease allows a lessee to lease a vehicle for a fixed monthly repayment amount and  consolidate all the costs associated with running the vehicle including: registration fees, licensing, servicing, tyre replacement, WOF’s and funding costs. In addition, a fully maintained lease includes 24/7 accident and breakdown assistance just by calling our freephone number.

The kilometres a vehicle will travel during the contract greatly impacts the lease rate given the implications for servicing and resale value. Underestimating kilometers can reduce the monthly rental rate for the lessee, but it can result in excess charges at the end of the contract if the contracted kilometers are exceeded. You have the flexibility to change the nominated kilometres during the lease contract if it looks like they will be exceeded which will ensure no additional charge at the end of the contract.

Vehicle choice can also be a major factor in determining the monthly rental amount: two cars can be identically priced but if one has a higher end-of-contract value (residual value) it will have a lower monthly rental rate.  

A lessee can adapt a lease to their individual needs and level of required support. If a fully-maintained lease is not required, non-maintained options are available where you will be responsible for the management and maintenance of the vehicle during the contract term.

An operating lease could relieve some of the stress normally associated with vehicle ownership. A leased car needn’t be recorded as a balance sheet asset, and having costs fixed for the duration of the lease can provide a greater capacity to budget and free up capital to spend elsewhere. 

Additionally, the leasing company’s buying power could help get you a better deal on your car.

Finance Lease

A finance lease also allows the lessee to lease a vehicle for a fixed monthly fee, but the lessee assumes the risks and rewards of vehicle ownership.

A finance lease will appear on the lessee’s balance sheet, with rentals represented as a liability.

A finance lease can give you the flexibility to nominate the residual value (balloon) at the end of the contract. At the end of the contract you can pay the leasing company the balloon and take ownership of the vehicle or simply return the vehicle if it is no longer required. Depending on the final sale price the leasing company can achieve you may be entitled to a refund, or be liable for the shortfall.

Under a finance lease, costs are fixed for the full term of the lease. Rentals can be tax deductible and you also have the option to take ownership of the vehicle at the end of the lease period by paying the leasing company the residual value of the lease. You can choose to hand the vehicle back at the end of the lease, but you may have to pay the difference between the sale value and the nominated residual.  

Sale and Leaseback

In a sale and leaseback agreement, companies sell their vehicles to a leasing company and lease them back for an agreed monthly amount, in the process freeing up capital and shedding the financial risks associated with running their vehicle fleet. A sale and leaseback may give you a cash influx that could be invested elsewhere in the business, and could free up time you would otherwise spend managing your vehicle fleet. 

Outright Purchase

An outright purchase gives organisations total control of all aspects of running a vehicle fleet but introduces all the risks also. Outright purchases are also recorded as balance sheet assets, and provide a potential injection of funds when vehicles are sold although these may or may not be what was anticipated when the vehicle was initially purchased.

Outright purchasing of a vehicle ties a company’s capital to a rapidly depreciating asset, using funds that could be invested elsewhere in the business. It also exposes owners to car-market unpredictability, both for new and used vehicles, which can complicate cash flow and budget forecasting.

Let Maxxia help you find the most cost-effective vehicle finance model for your business. Contact us today.