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What is Finance Lease on a Van?

December 19th, 2016

Self-employed? Need a vehicle? There’s a good case to consider Finance Lease on a Van.

You’ve finally taken the leap and started working for yourself. It’s an exciting time in your career. However, among the endless things every entrepreneur needs to sort out—your budget, advertising, taxes, insurance—maybe you’ve decided you’ll need a vehicle, too.

You’re not alone. For tradesmen, florist, delivery drivers, and many small business owners in the UK, their vans are the bedrock of their operation. They simply wouldn’t be able to do what they do without them.

But when you’re a new business, financing a van might seem like a risky undertaking. Your financial situation may be uncertain. How can you afford to drop the cash on a new vehicle, if you’re not sure exactly what you’ll be earning in the coming months? What if it breaks down, and you’re unable to work and earn money?

The Magic of Finance Lease

Well, it’s not “magic” per se, but Finance Lease can be brilliantly useful if you find yourself in this situation.

This solves the ‘chicken-or-the-egg’ problem. You can get a reliable vehicle with fixed costs, with a low amount of money involved. You can use it to build up your business, and sort out any larger costs down the line when you’ve built up credit.

Plus, you can take full advantage of your self-employed tax situation. Here’s how it works…

How Finance Lease works for the self-employed

If you’re doing a normal ‘hire purchase’ scenario, your costs would be calculated as follows. Imagine you buy a hypothetical van which costs £10,000.

Calculating your monthly payments would look something like this…

No Finance Lease on A Van

You have the cost of the vehicle, plus the tax, divided by how long you’re financing it over. Your monthly payment would equal £208.

Now, if you’re doing a Finance Lease on a van, the math will look more like this…

Finance Lease on a Van

Your monthly payment would equal £145+VAT.

You get to exclude VAT (provided you are VAT-registered, and using your vehicle for your business). So right out of the gate, you get to claim 20% back in your pocket.

Secondly, you only have to make payments based on the value of the vehicle while you’re using it. So on our hypothetical £10,000 vehicle — if we determine it will be worth £5000 in 5 years time, we subtract that from the total. So you will pay payments on the first £5000 of it’s worth, divided by your finance period.

Once the contract is up, you have two options. You can either pay the “balloon”, which is the market price of the vehicle once you’re finished with it, and you can keep the vehicle.

Or, you can dispose of it, and get a payment for the equity you built into the vehicle over time.

Is Finance Lease right for you?

Ultimately, it’s going to boil down to your personal situation. There are pro’s and con’s to any approach.

Finance Lease on a van would be right for you if:

  • You want low monthly costs
  • You don’t want to tie up your business capital in a depreciating asset
  • Would like to keep your vehicle as an asset on your accounting books
  • Want to use your self-employed tax situation to your full advantage
  • Your business has at least 12 months of trading history
  • You’re looking for flexible mileage

It might not be the best solution if:

  • You have poor credit history
  • You’re not looking to do basic maintenance on the vehicle (oil changes, tyres, etc).
  • You don’t want the hassle of disposing the vehicle once you’ve finished with your contract.
  • Have less than 12 months of history as a sole trader, LLP, etc.
  • To summarise, Finance Lease on a van can be a useful tool if applied correctly when starting up your business.

    It helps you keep costs low in the beginning, while giving you an asset to build a strong financial foundation. You can minimise the risks of repairs, whilst taking full advantage of your unique tax situation while you’re building your business up.

    Once you’re finished—you can either sell it for profit, or renew!

    If you think you’d like to pursue this, or you still have more questions—why not speak with one of our advisers. We know finance lease inside-and-out and would be happy to help.

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