Forklift Hire Finance Options Explained

Forklift hire finance options can be confusing at first. And when it comes to hiring a forklift truck, the last thing you need is financial jargon. That’s why we have put together this helpful guide to the different types of hire agreements available from Jofson.

Within the forklift industry you will find that there are two common finance options usually discussed with customers – Contract Hire and Hire Purchase. There is also another – Finance Lease – but this is now very rare and not usually offered as a rule. In this guide we will explain the differences between each of these forklift hire finance options.

  • Contract hire, also known as rental, is the most popular method of funding in the UK with circa 65% of all finance agreements using this system. It enables the customer to have full use of the asset over an agreed period of time at a fixed price without many of the risks of ownership.
  • Contract hire is an off balance sheet method of finance which can be used to improve gearing and return on equity within a business. In other words, the profits made are earned on a reduced amount of money showing as assets on their balance sheet due to the trucks not showing as assets and improving the ratios.
  • Using this method means the rentals are fixed from day one and usually include a maintenance package. Ideal for easy budgeting over the life of the agreement with no unexpected costs of use, the trucks will be delivered at the outset of the agreement and collected at the end of the term by the supplier, who would then hope to replace with new equipment.
  • In contract hire, the cost of the truck is not fully repaid during the term of the agreement, as the supplying dealer has set a guaranteed repurchase amount (residual value) – therefore the rentals are cheaper than other forklift hire finance options, but there is no equity in the asset to be recovered.
  • As the agreement is for a rental there would not normally be a requirement from the business to require a capital expenditure authority. This usually makes it easier, as customers can place an order without it being signed off at board level. The rental is fully tax allowable against taxable profits too, which accelerates tax relief during the rental term.
  • If the contract is signed on a minimum term, the hirer must give the required period of notice (usually 3 months) prior to the end of the original term. Otherwise the agreement will continue until notice is given on either side.
  • Make sure it is understood what is included/excluded in the maintenance part of the agreement, such as what the excess hours charges are. If it is a minimum term contract, make sure customers are aware of the notice period required.
  • Check the profile of the deal to ensure it is the same as others it is being compared against. The position relating to tax allowances are changed on a regular basis by the Government so it is recommended that the customer relies on their own accountant for tax advice.
  • Hire Purchase can also be referred to as Lease Purchase. This is essentially the same product, but historically hire purchase has a deposit whereas lease purchase usually has 1-3 payments payable up front.
  • When choosing hire purchase, the customer is required to pay the VAT in full at the beginning of the agreement and will take ownership when he pays the final payment. This normally includes a nominal option to purchase fee (usually £50) which represents the legal consideration required to pass the title from the finance company to the customer.
  • Customers will have the same ability to claim capital allowance as outright purchase but it spreads the cost with fixed payments from the outset. Term and payments can be tailored to suit the customer’s requirements. Interest payable is also allowable against taxable profits. The asset is shown on the customer’s balance sheet from day one although ownership doesn’t pass until the end of the agreement. This increases the asset base of the business and will be depreciated down each year.
  • Hire Purchase / Lease Purchase will spread the cost of purchase over the period of the agreement and is good for cash flow planning. If the customer defaults, the agreement cannot be cancelled and unlike an overdraft the debt cannot be recalled early. Interest rates are fixed at the time of entering in to the agreement, so there’s never any risk of interest rate increases. This can leave other credit lines free and it’s often good to separate from bank borrowings in case of unforeseen requirements.
  • If the truck is no longer required then a settlement figure can be requested from the finance company. If early in the agreement this can often be higher than the value of the truck as more interest is charged in the early part of the agreement. If payments are late then this can adversely affect a company’s credit rating.
  • A Finance Lease is a hire agreement where the customer will rent the equipment for a fixed period of time (primary period) and pay VAT on each rental as due. Although ownership does not pass at the end of the term the customer can offset all rentals paid against tax – accelerating tax relief.
  • At the end of the term (primary period) the agreement will continue and an annual secondary period rental will fall due – usually an annual payment equivalent to one month regular payment. This will continue until the truck is sold or scrapped. If sold the customer will usually retain the majority of the proceeds of sale. It must be sold to a third party at “arms length” i.e. cannot be sold to the customer or their associated business due to the fact they have already claimed all the tax relief available on this asset and cannot then begin claiming capital allowances.
  • Fixed rates of interest apply protect customers from rate hikes. The customer will benefit from sales proceeds, leaving other credit lines free and enabling cash flow planning. This means there is no risk of forced early repayment provided customers do not default.
  • This is not a very popular method of funding, as it can be complex at end of primary term or if truck is to be sold as the finance provider will need to be involved. It holds many of the same tax benefits of contract hire but the customer substitutes use for ownership.

Support where you need it

Now that you have all the facts about the three forklift hire finance options, our team can help you make your decision carefully based on your specific needs. Remember, there are pros and cons to each, but there is no right answer. The best finance option ultimately depends on your business and how it operates. We’re just an email or phone call away if you need to discuss these forklift hire finance options any further. 

Questions? Get in touch!
Mitsubishi Forklift

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Geoff MartinSales Director
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