Let’s begin by stating the obvious – buying an HGV is an expensive business!
What that means is that it’s essential to secure a financing deal that is a suitable and cost-effective solution for your particular business circumstances.
Discounting the theoretical possibility that your business is sufficiently cash-rich to purchase the vehicle outright from its own financial resources, you are likely to be facing HGV finance options that come into one of the following three categories:
- Hire Purchase (HP);
- finance leasing;
- operating leasing.
All of these have their own respective characteristics. Very briefly they can be described as:
- hire purchase. The familiar “HP” is well known. It primarily involves somebody purchasing the truck and then allowing you to use it in return for a monthly repayment of the capital sum plus charges. Essentially that means that you are buying the vehicle back from them in instalments;
- finance leasing. In this option, the funds provider will purchase the vehicle, and you will pay a monthly sum to use it. The value of the vehicle will be covered over the term of the agreement which should be for the entire economically viable life of the vehicle as a new asset.
At the end of the agreed period of the lease, you have two main options – enter into a peppercorn rental and carry on using the vehicle. This is typically the equivalent of one monthly rent per annum. You might also sell the vehicle on behalf of the finance company and typically retain 95% of the sale’s proceeds.
- operating leasing. This means that a portion of the vehicle’s total value will be recovered from you by the lender over the term of the agreement. At the end of the term and your monthly repayments, you are free to return the vehicle to them without further responsibilities on your part. The vehicle may be treated as off balance sheet – subject to your auditor’s approval
Which is appropriate for you?
The above description is only a very brief summary of the characteristics of the three options.
Each of them has its own implications for things such as your balance sheet, asset register and possibly tax liabilities. To decide which is the most suitable HGV finance option for you, it will be necessary to look at the financial position of your business and to understand your strategic objectives for the period ahead.
For example, in the case of an operating lease, the monthly payments can be considered to be, for all intents and purposes, rental. As such, that monthly cost can be taken into your standard profit and loss accounting as an allowable business expense. The equipment may be treated as off-balance sheet – subject to your auditor’s approval.
Whether or not that is advantageous to you or fits in with your plans would need to be ascertained.
HGV finance is typically regarded as being something of a specialist area.
In very general terms again, your business will need to meet certain criteria to be eligible for some of the facilities mentioned above. Typically, it will need to be seen to be an active business entity with some form of verifiable history and accounts that are capable of being objectively analysed to be sure that the repayments will be affordable.
It may be possible to have an initial and entirely informal discussion with a specialist provider of HGV finance. Once they understand your requirements in more detail, they may be able to give you some initial guidance on options that might be open to you.