Funding Methods - Lease Purchase

Risk: You assume risk.

Market Share: 5% and growing.

Popular With: Fast growing small businesses who cannot afford upfront business costs. Contrary to its name, this is not a lease but a purchase scheme similar to Hire Purchase but with an inverted payment profile: a lump sum being paid at the end of the vehicle's life as a final 'balloon' payment.

Advantages:

Ø Cashflow: smaller front-end deposit and lower monthly charges ease the initial repayment burden.

Ø Investment: allows more cash to be pumped into the business early on, and is therefore attractive for companies with high start-up costs.

Ø Others same as 'Outright Purchase'.

Disadvantages:

Ø The business must be in a healthy shape at the end of the vehicle's fleet life to pay the balloon, which may exceed the vehicle's residual value.

Ø Exposure: the fleet may become vulnerable to residual value decreases and exceptional maintenance costs. You will need high calibre expertise to manage this method of acquisition effectively.

Ø Budgeting: it is difficult to provide robust forecasts with this level of risk.

Ø VAT not recoverable unless 100% business use.

Summary:

Useful for companies with high initial start-up costs, as it delays the repayment burden until later in the vehicle's operating cycle. Steadily losing ground to Contract Hire, particularly since the tax changes in August 1995.