Financing For A New Business
We’re back again for another Finance Friday, this time exploring the decision to finance a vehicle with a new business which poses its own individual challenges.
If you’re reading this blog, your story might look something like this: you’ve recently decided to take life into your own hands and do things your way. You might have been made redundant, or just decided to get out of what you’re doing now to start your own business. Whether you’re a sole trader painter/decorator or someone who wants to start their own sandwich run, you’ve decided you need a van.
Where do I start?
It’s a bit of a catch-22 opening a new business and getting finance. The finance companies want to know you can pay regularly and on time, all the things associated with an established business, but if you’ve only just started, there’s no proof! Luckily, it’s most definitely available for new businesses, though it does depend on your personal credit rating more and the structure of the deal amongst other things. Like we mentioned in our previous blog about poor credit, it’s important to make sure you’re on the electoral register. It also helps being at the same property for over three years.
The finance company may ask for further information, such as proof of trading, bank statements or Directors Guarantee. For this reason, it makes it a lot easier to obtain finance when you’re going from a sole trader to a limited company as you may already have many documents required to prove you’ll be able to pay.
What’s a director’s guarantee?
A director’s guarantee helps to reassure lenders that they will definitely get their money back should your company be unable to repay the loan. Limited companies are completely separate entities to their owners. In short, should the firm be unable to repay its loans, it would fall on you personally to settle up.
It’s a precaution taken with finance companies to make sure someone is good to pay the outstanding debt if something falls through – it’s often asked for new businesses looking to lease and helps them obtain finance.
Should I get a finance lease or hire purchase?
In a finance lease, ownership lies with the lessor (finance company). The lessee (customer) has the right to use the equipment and does not have the option to purchase. When on a finance lease, you pay VAT on the vehicle monthly.
At the end of the primary period of the lease agreement, there are three option:
- Return the vehicle to the lessor, who will sell it and refund any surplus sale proceeds to you, the customer, as a rebate of rentals (this figure is usually around 95% of the surplus sale proceeds with some of the surplus being retained by the lessor to cover administration costs)
- You (the customer) can act as an agent for the finance company and arrange for the sale of the vehicle to an independent third party. The finance company receives the full sales proceeds and will refund you (the customer) a fixed percentage (as above) of any surplus that is generated as a rebate of rentals.
- You (the customer) can continue to use the vehicle for as long as you want on payment of an annual secondary rental (commonly known as a peppercorn rental) This is normally equivalent of one monthly rental.
In hire purchase, the hirer has the option to purchase. The hirer becomes the owner of the asset/equipment immediately after the last installment and option to purchase fee is paid. Unlike in a finance lease agreement, the VAT is paid upfront with 10% of the price of the vehicle.
We can’t tell you the best option for your business, but we’d advise having a look into all the options to see which would suit your needs. You can usually reclaim the VAT for buying a commercial vehicle if you use it for business so it’s something to keep in mind when making your decision. We’ll always give you a quote for both as well as a full price for the vehicle so you can make a justified decision.
Is there anything else I need to know?
As we’ve mentioned before, it’s always down to an individual’s credit history when applying for finance and every case will always be different. There’s no set rule whether someone will be outright accepted or rejected for finance so it’s always worth applying if obtaining a vehicle on finance is something you’ve been looking into.
If you think financing is something you want to look into, feel free to have a look around and ask us any questions if you’re unsure when it comes to applying; we’ll be more than happy to help explain it all!