How to finance a fleet of lorries is a big decision for all haulage businesses and there is a lot of advice floating around about how to finance vehicles.
Tractor units cost money and the numbers are never small! The options available all have their good and bad points, which can serve to confuse the issue.
What are the options?
The four main options are as follows:
- Buy the lorry outright
- Finance lease
- Hire purchase
- Operating lease
What is the best option for your business will depend its particular circumstances, and the asset being acquired, but the aim is to achieve to lowest whole of life cost of utilising the vehicle.
For example, an outright purchase involves a larger initial outlay than the other three, but over the lifetime of a vehicle may require fewer funds overall. However, that outlay will soak up large amounts of cash that could be utilised elsewhere in the business.
Alternatively, a hire purchase agreement may involve the lowest cost up front, but will attract interest charges over the term of the agreement.
There is no substitute for sitting down and outlining the cost and cash flow implications of each option to understand what those options will cost you, and when the cash is required.
There are also non-financial considerations to bear in mind too.
Brand image is a big consideration and many hauliers aim to renew their fleet on a regular basis even if vehicles are in good working order. Leasing agreements, which may appear favourable from a cost perspective, may tie you in for longer than you’d like from a fleet renewal viewpoint.
If you elect to keep the vehicle after the initial hire purchase term, you may well find you’ve got an asset with few associated financing costs. However, on the other hand when the term of the agreement is over, there are often good deals to be had on exchanging that vehicle for a newer one.
The state of the cash flow of a haulage business can have a big impact on the financing decision. An outright right purchase may mean less cost in the long run, but is a big one off call on cash resources.
The more manageable payment schedule of a hire purchase or finance lease under good terms may smooth the way for building a fleet while spreading the costs over the term of the lease.
The timing of the VAT payment for the lorry can also be key for cash flow. Both buying a lorry outright or via a hire purchase will trigger the entire VAT amount on the day of purchase. This is likely to be completely reclaimed, but there can be timing delays before this happens that can affect cash flow.
With a finance lease the VAT is included in the monthly payments, and so is spread out over the term of the agreement.
The tax angle
It is also important to understand the tax relief implications and their timing under each option.
With a hire purchase, finance lease, or buying the lorry outright, you are likely to attract greater initial tax reliefs due to 100% capital allowances in the first year (up to £200,000 currently). Again, it is important to look at the timing of purchases to take best advantage of these allowances
With an operating lease, tax relief is spread over the period of the lease.
With the range of options available to hauliers, and the various issues to consider there is no hard and fast rule that works in all cases. There is also no substitute for sitting down with your accountant and planning the timing and method of acquiring new vehicles within the context of your business and its particular characteristics.