Choosing the right funding options for your fleet

Funding decisions for your fleet can involve a great deal of analysis and research. There’s much more to it than just a question of deciding whether to lease or purchase outright and choosing the best method is an important area of a fleet manager’s responsibilities.

This section is intended to help you make the right decision. It outlines all the vehicle leasing options available and provides a list of pros and cons for each, so you can clearly see the difference between each one.

Once you’re aware of the relative advantages and disadvantages of each option, you can make a better-informed decision and find the right funding choice for your cars and vans.

Your funding options

Business Contract Hire

The arrangement

Business Contract Hire is a form of leasing. It’s a long-term rental agreement whereby you have the use of a fleet vehicle for a fixed period of time and mileage. Ownership of the vehicle remains with the leasing company.

How it works

  • An initial rental payment is followed by equal monthly payments for the remainder of the contract term
  • Service and maintenance can be included within the contract, as can other fleet management services
  • End-of-contract charges may apply if the mileage exceeds what was specified in the contract, or if there is additional damage beyond fair wear and tear
  • At the end of the contract there is no option to purchase the vehicle, it is returned to the leasing company
Salary Sacrifice

The arrangement

Salary Sacrifice involves trading in a portion of gross salary in return for a vehicle which is made available to a company employee. The employee would generally not otherwise have been eligible for a company car.

How it works

  • The employee gives up a portion of their gross salary in return for access to a company car
  • The employee saves the tax and National Insurance on the amount of salary sacrificed but will pay benefit-in-kind tax on either the vehicle or the amount of salary sacrificed, whichever is greater
  • The employer saves the National Insurance and, potentially, pension contribution on the salary amount sacrificed
  • For cars with CO2 emissions of less than 76g/km the benefit-in-kind tax is payable on the vehicle, irrespective of the amount of salary sacrificed.
Finance Lease

The arrangement

As with contract hire, the vehicle is leased for an agreed fixed period. While it remains the property of the leasing company, the residual value risk rests with the lessee.

How it works

  • An initial rental is paid, followed by equal monthly payments for the remainder of the contract term
  • Service and maintenance can be included within the contract
  • Since residual value risk rests with the lessee, there are no end-of-contract mileage or damage charges
  • At the end of the contract the vehicle is sold, with the proceeds used to settle the balloon payment. Any shortfall must be made up by the lessee. If there is a surplus, a proportion of this will be returned to the lessee
Sale and Lease back

The arrangement

If you currently own your fleet outright but are looking to switch over to Contact Hire to gain from the associated benefits, Sale and Lease back offers a mechanism to achieve this. Ownership of the vehicle transfers to the leasing company.

How it works

  • You sell your existing owned vehicles to the leasing company for an agreed sum and then lease them back over an agreed period of time
  • Responsibility for residual value risk depends upon the type of lease under which the vehicle is leased back
  • What happens at the end of the contract in terms of excess mileage or damage charges, and whether you can continue to use the vehicle, depends upon whether you leased the vehicle back under a contract hire or finance lease agreement

The finance

Details of the lease – residual value responsibility, excess mileage and damage charges – depend on which leasing option has been selected, but ultimately follow the same format of an initial rental, followed by monthly payments with an agreed end of contract arrangement (full payout or balloon payment) as per the options mentioned above.

Affinity Scheme

The arrangement

Allows employees access to cars at attractive rates, taking advantage of discounts negotiated by the leasing company. The contract is between the employee and the leasing company, there is no financial involvement on the part of the employer.

How it works

  • Drivers can select contract period, contract mileage and service, maintenance and repair levels
  • The employee typically pays an initial deposit, followed by monthly payments for the duration of the contract
  • Depending upon the finance option chosen, the employee might be able to take ownership of the car at the end of the contract
Contract Purchase

The arrangement

A deferred purchase agreement where the company makes regular monthly payments and a final balloon payment at the end of the contract. Ownership of the vehicle passes to the company.

How it works

  • An initial rental is followed by equal monthly payments for the remainder of the contract term
  • Service and maintenance can be included within the contract, as can other fleet management services
  • At the end of the contract, having paid the balloon payment, the company has a number of options. They can:
    • Keep the vehicle
    • Sell it themselves
    • If agreed at the inception of the contract, sell it back to the leasing company at the guaranteed buy-back price
Lease Purchase

The arrangement

A conditional sale agreement where the company makes regular monthly payments and a final balloon payment at the end of the contract. Ownership of the vehicle passes to the company.

How it works

  • A deposit is paid followed by equal monthly payments for the remainder of the contract term
  • Service and maintenance cannot be included within the contract
  • At the end of the contract the balloon payment is made and the vehicle is kept by the company