There are ways to finance your purchase when you want to buy a company van for your business use but do not want to buy it outright. You can buy your company van through hire purchase or finance lease. Usually, these types of finance are offered by finance houses like the banks.
Financing options
| Hire Purchase | Finance Lease |
|---|---|
| You would require to pay a deposit or down payment for your van. say 10% to the van dealer. | No deposit required. |
| The balance of the 90% cost will be financed through hire purchase. | The purchase cost is leased. |
| You would pay monthly instalments (plus interest on the HP amount) to the bank. | You pay monthly lease payments to the bank. |
| The bank owns the company van during the hire purchase period. | The bank owns the van but you have the right to use the van throughout the leasing period. |
| You own the van at the end of the HP period. | You have an option to buy the van at the end of the lease period. |
Assess your business’s ability to pay for your company van’s monthly payments
Before the bank could offer you hire purchase or lease financing, they would assess your business’s ability to repay. For this purpose, they will usually look at your gearing ratio and interest cover ratio.
What is the gearing ratio?
Gearing is the proportion of your business’s debts in relation to your capital in your business. Generally, the bank would be delighted to see a gearing of no more than 50%. The bank would assess your company accounts in order to calculate your gearing ratio. Your balance sheet page would reveal these figures.
Gearing ratio = Long term + short term debts + bank overdraft divide by shareholder’s equity x 100%
Gearing ratio formula
Let look at the Successful Business Limited year 2021 Balance Sheet, the long term loan is £10,000 and short term loan included in the creditor’s figure, say is £50,000 and the shareholders’ equity is £6,403,702. The Gearing ratio is £60,000/£6,403,702 x 100% = 0.93%. The company would have no problem getting a Hire purchase or leasing finance.
What is the interest cover ratio?
Interest cover ratio is used to assess your business’s ability to pay your interest obligations on your debts. Generally, the higher the number the stronger your company to be. For this, the bank would be delighted to see an interest cover ratio of 2:1 and above.
Correspondingly, your bank would assess your profit and loss account to calculate your interest cover.
Interest cover = Profit before tax and interest divide by interest expense
Interest cover formula
Let take the Successful Business Limited profit and loss account’s figures as an example.
The profit before tax and interest is £3,789,222 and interest expense is £19,320. Therefore, the interest cover ratio is £3,789,222/£19,320 = 196:1.
Your company status with Companies House
The bank would also check your company’s status with Companies House. Generally, if you file your confirmation statement and company accounts promptly, your company will remain in good standing and have an “active” status.
However, if Companies House has changed your company status to “proposal to strike off”, this would be due to your confirmation statement or your company accounts are overdue. File the overdue documents as soon as possible.
If your company has been dissolved for the non-filings then you would have to restore your company before you can apply for Hire purchase or leasing finance.
