From the profit and loss account we now have a clearer picture of what john would be able to afford without it really affecting him and his business. John earns a profit of around £39,300 each year but john said that this had been a quite year for the business.
There are two main options for John either to buy the cars straight off or lease them and eventually buy them in around four years. HSBC are one of the only banks who have special vehicle solutions and they offer the best deals for john but which one. There are four options they are:
- Contract hire
- Contract purchase
- Contract management
- Hire purchase
Contract Hire
This is an operating lease, which allows John the use of the vehicles for a predetermined fixed period at a fixed cost (subject to mileage and fair wear and tear) where HSBC would purchase the vehicles and carry the disposal risk. A fixed cost vehicle maintenance package can be included in an agreement. The advantages of this are:
- Assists cash flow and needs little capital investment
- Costs are predictable and risk free allowing for easy budgeting
- Input VAT on the price of the car is reclaimed by us and passed on to John in the form of lower rentals
- Payments take into account the vehicles future residual value, so John would not have to repay the entire capital cost, giving John reduced payments
- Flexible maintenance packages which can include breakdown cover and relief vehicles
- Vehicles are accounted for on an off balance sheet basis
- The administration and management burden is borne by HSBC
- Rentals are allowable as a business expense
Contract Purposes
A hire purchase agreement where HSBC guarantee the resale value at the end of the term for a known, fixed amount. In addition, a full, fixed cost maintenance agreement can be included. John would get legal title, and therefore ownership of the vehicles, when all payments due under the agreement have been made. The advantages of this would be:
- Assists cash flow and needs little capital investment
- Costs are predictable and risk free allowing for easy budgeting
- Payments take into account the vehicles future residual value, so John would not have to repay the entire capital cost, giving John reduced payments
- Flexible maintenance packages which can include breakdown cover and relief vehicles
- The administration and management burden is borne by HSBC
- Writing down allowances: 25% of the capital cost of the cars can be offset against tax each year up to a maximum of £3,000 per year
- Minimum VAT on invoices if john has partial exemption
- Interest paid is allowable as a business expense
Contract Management
The vehicles will be paid for and owned by John after being sourced by HSBC. They provide a package of in-life services in return for a standard monthly fee. HSBC guarantee a resale value on each vehicle. The risk in the purchase is reduced and John would receive a standard invoice in respect of the services selected. At the end of the contract the vehicle is returned to HSBC and the guaranteed resale value will be paid to John Smith. The advantages of this are:
- Vehicles sourced and purchased at there preferential rates
- No funding charges
- Incorporates a service agreement which can include maintenance, relief vehicle and accident management
- Writing down allowances: 25% of the capital cost of the cars can be offset against tax each year up to a maximum of £3,000 per year
Fixed cost maintenance
Covers all routine, in-life-running costs normally associated with a vehicle, with the exception of oil, fuel, glass and insurance. It has the advantage of utilising our expertise to minimise costs and maximise fleet operating efficiency.
Hire Purchase
Hire purchase would let John buy the vehicles without having the money up-front. Vehicles appear as an asset on John’s balance sheet and when he has finished the repayments, John could pay a nominal option to purchase fee to own them. Tax and balance sheet considerations are therefore exactly the same as for a cash purchase. But without the drain on Johns capital and cash flow. The advantages of this option are:
- Fixed instalments
- Option of variable rate of interest
- Flexible repayment period
- Tax allowances may be available.
Looking at Johns income of the business I would have to say contract management would be the best option for him because it would help reduce cost due to HSBC paying for most of the running costs of each car such as tax and MOT. With John raising £39,300 a year HSBC have produced a low monthly cost for all 20 cars and have accepted all 20 of Johns old cars as the first 5 monthly payments which means John will not have to pay anything for 5 months. HSBC are charging John £1700 a month for all 20 cars. This has worked out very cheap because HSBC have planned around John’s finances. They have given John a 6 years lease period and after the 5years John can either pay off the rest of the debt owed or receive a new fleet of cars and carry on the way he was doing. This is another profit and loss account to see Johns company’s finances after the lease of the new cars this is estimation based on last year’s account:
Given all this Johns profit margin should increase on the basis of the new fleet of cars will attract more custom.