Do you know that trucking is a lifeblood industry of the economy? The sector moves tons of medicines, hospital supplies and perishable commodities like food and drinks. Without the trucking industry, the economy will come to a halt, and vital good and services would disappear.
Moreover, trucks are expensive at an average price of £60,000 or more per vehicle. To keep this industry rolling, business owners and truck drivers must have access to truck finance.
There are several options for commercial truck financing. Hence, the options will help companies decide to purchase trucks fit to their need in rolling out their goods and services.
Hence, approximately three-quarter of all truck purchases in the UK is through financing. The data confirms that a vast majority of truck business owners need credit access.
How does truck finance work?
Are you new to the trucking industry? Have you ever experience taking out a loan to purchase a truck before? The article will let you know how truck finance works.
The first thing you must understand is that financing for a commercial truck not the same when getting a car loan. A personal auto loan will have interest rates below 5%. On the contrary, commercial truck loan interest rates would range from 5% to 30%.
On the one hand, banks do not offer credit to most trucking businesses because of the higher risk to fail in this industry. Luckily, there are available alternative lenders that focus the loan platforms on truck financing.
The common reasons for a driver going to truck financing:
1. To buy a new or used truck
2. Leasing a new or used vehicle
3. To repair a truck that you already own
How to qualify for commercial truck financing?
In traditional car loans, your credit score, business’ revenue and longevity of your business will determine your eligibility.
However, commercial truck financing is different because it is a specialized industry. The truck itself that you buy will serve as the collateral for the money you borrow. In this way, the lender will have a lower risk if the credit goes default. So, even if you are not a good borrower on paper, you can still qualify.
While most borrowers intend to apply qualify, there are variations around the terms and rates. The best borrowers can be eligible for a 100% credit enjoy interest rates for as low as 5%. Nevertheless, borrowers that have red flags (low credit score, old truck) will need down payment and pay higher interest rates.
Types of truck finance
You may have much cash and can afford for an outright purchase. However, do not ignore credit financing. It can preserve your money and allow smooth cash flow allowing your trucking business to generate better return instead of rolling your dough in a depreciating asset.
There are five types of truck financing you can choose:
1. Hire Purchase
Hire purchase agreements usually require a 10% deposit and followed by regular payments spread over three to five years. The amount will cover the total capital cost of the truck, interest rate, and fees. The ownership of the truck is transferred to you as soon as you complete the contract. Some lenders may give the option for you to make a large final payment called “balloon payment. The strategy will lower monthly payments. The monthly pays will cover the interest element.
Advantages:
- You can own the truck at the end of the agreed payment terms and give you residual value
- You can claim capital allowances
- If you want a fixed rate deal, the monthly repayment will be the same even if interest rates changes
Disadvantages
- Paying of VAT at the start of the contract. However, you can reclaim the VAT after the following quarter
- Some deals allow you to spread the VAT over three months
2. Contract purchase
Similar to hire purchase but repayment cover the depreciation of the vehicle during the contract period and not in the total cost. The supplier will provide the estimate of residual value before the contract will start. You can have the option to pay the supplier the final big payment to buy the truck or return the unit after the contract period.
Advantages:
- The monthly repayment is lower
- Flexibility at the end of the contract
Disadvantages
- Even if the monthly payment is low, the overall costs of the agreement are higher
- There is an agreed distance of travel
- Penalties may apply if you exceed in the allowed range of the travel
3. Finance Lease
The finance lease does not give you ownership of the truck. Thus, monthly rental payment is covering the full price of the vehicle plus interest. As the end of the term, you will act as an agent of the leasing company. You can sell the truck to a third party. You can keep around 95% of the sale price. However, you may opt to extend the agreement but paying the lower monthly rate.
Advantages
- Low initial outlay because VAT is paid every month and reclaim the VAT afterward
- The whole of each rental repayment can opt to offset against tax
- The “Balloon repayment” at the end of the contract will keep monthly payments lower on shorter lease.
Disadvantages
- On- balance sheet financing
- No protection from poor residual values
4. Operating Lease
The lease period is shorter than the truck’s life. Thus, the customer is paying for the depreciation and finance cost and not the entire price of the vehicle. The lender will recover the difference by the time they sell the truck to a third party at the end of the lease.
Advantages
- Off-balance sheet financing
- No VAT payable upfront
- The entire monthly rental fee can be deductible
- Cheaper
Disadvantages
- No asset at the end
- When the residual forecast is weak, possibly more significant monthly repayments
- No capital allowances
5. Contract Hire
Fleet management services are offered such as costs to a fixed monthly payment is covered. Hence, your budget planning becomes easy. It is regarded to be low-risk and attractive to risk-averse firms. Hiring period is typically ranging from 12-60 months.
Advantages
- All-inclusive fixed monthly pays
- Off-balance sheet financing
- Fixed interest rates
- You can hire whenever it matches your needs and avoid problems on disposing the unit at the end of the term
Disadvantage
- More costly than other options because you must buy more services and risk transfers
- Can be expensive if you cancel the contract