Fleet finance options explained

When looking for ways to finance your vehicle fleet, it is easy to get bogged down in technical jargon, making it difficult to break down the facts and get a clear and simple comparison. In deciding which finance method is best for your fleet and business, it is important to fully understand the differences between the different funding options. This article aims to make the decision process easy, laying out the different types of finance options available to fleets.

The different types of finance

Hire purchase

A hire purchase is where you are given immediate use of the vehicle of your choice by the financier, in exchange for regular payments over a period of time (between one and five years). Once the final payment is made, you own the vehicle outright.

Hire purchase is ideal for businesses that wish to own the vehicle at the end of the term, or if you don’t know when the vehicle will be replaced.

Chattel Mortgage

In a Chattel Mortgage arrangement, the end user takes title to the vehicle immediately, as it is considered a cash sale. However, the financier takes a mortgage as security over the vehicle until repayments are made in full.

This type of loan best suits businesses that account on a cash basis with an annual turnover of less than $1m, as GST (goods and services tax) can be funded upfront and a full GST claim in the first BAS (business activity statement) cycle is permitted.

Operating lease

An operating lease is an arrangement whereby the financier owns the vehicle and leases you the vehicle for one to five years in exchange for lease rental payments – basically like a long-term car hire. At the end of the lease you are required to return the vehicle to the financier.

Operating leases are an ideal option for businesses wanting the most current vehicle models – leasing them in this manner allows you to continually upgrade vehicles. Operating leases are also suitable when you don’t want to take the residual risk on the vehicle.

Finance Lease

Similar to an operating lease, a finance lease is a rental arrangement where the financier owns the vehicle, and you lease it from them for an agreed term. Essentially, the lease provides you with finance to acquire vehicles for your business fleet.

This form of funding is suitable if you desire the flexibility of leasing, but also want the option to purchase the car at the end of the term.

Choosing your finance

When choosing which method of finance is right for you fleet, you need to ask yourself several questions about your business’ needs:

  • Does your business wish to lease or own (either upfront or at the end of the term) your company vehicles?
  • Do you want to minimise the residual value or risk on the vehicle?
  • Does your business account for GST on a cash or accrual basis?

Your answers to these questions can then be used to determine which finance method would provide you with the most benefits.

Final thoughts

Although deciding on a method to fund your fleet may at first seem overwhelming, once you go through the process and figure out exactly what you need, the end decision is made much simpler. However, as with any financial decision, it is imperative that your options are discussed with a financial professional and your fleet management company prior to making a final decision.

Do you find the different fleet funding options confusing?

Compare the different fleet financing options.

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