HGV finance for tractor units, rigids and trailers

The operator's licence shapes HGV finance in two ways that are easy to overlook.

Authorisation. Your licence authorises a set number of vehicles and trailers at named operating centres. If new vehicles would take you over that number, you need a variation before they can operate, and that takes time. Check your margin before signing for extra vehicles.

Financial standing. Operators must show they have enough money available to run the vehicles they are authorised for, with a higher amount for the first vehicle than for each additional one. The Traffic Commissioners' guidance on finance explains what counts: cash in the bank and certain undrawn facilities such as an overdraft can be counted, whereas the vehicle finance that bought the trucks does not add to available money. Adding vehicles to your authorisation raises the amount you need to show, so plan working capital and fleet growth together.

Lenders also look at compliance. Your Operator Compliance Risk Score, any public inquiry, and prohibitions on roadworthiness or drivers' hours are part of how a vehicle lender judges whether the business will still be running at the end of the agreement.

A new unit brings the latest emissions standard, lower fuel use and a warranty, and can be financed over longer terms. A used unit costs much less to put on the road, and many operators run a mixed fleet with new units on core contracts and used units for spot work. Lenders typically set a maximum age for the vehicle at the end of the agreement, which limits the term on older units.

For a used HGV, lenders and careful buyers check:

• Outstanding finance and any history as a write-off or stolen vehicle
• Annual test history, advisories and any prohibitions
• Recorded mileage against service records and the tachograph calibration
• Emissions standard, since older vehicles can face charges in clean air zones
• Condition of the fridge unit, tail-lift or crane, where fitted

Match the term to how long you will realistically keep the vehicle. Running a unit past its warranty on a long term can leave you making finance payments and heavy repair bills at the same time, while a short term on a vehicle you will keep for years puts unnecessary pressure on monthly cash.

Illustration only, with round hypothetical figures and no rates. An operator running eight units wins a three-year distribution contract needing three more units and four trailers. New units cost around £100,000 each and suitable used trailers around £20,000 each.

• The operator confirms the licence has margin for three more vehicles and that its available funds meet the higher financial standing figure.
• The units go on lease purchase over the contract length with a balloon set around the expected trade value, keeping monthly payments in line with contract income.
• The used trailers go on hire purchase over a longer term, because they will outlast the contract.
• Invoice finance on the new customer's account covers fuel and wages until the first payments arrive.

• Balloons that bunch up. Several lease purchase agreements ending in the same year can create a large refinancing need. Stagger end dates where you can.
• Residual values move. Used truck prices rise and fall with supply of new vehicles and export demand, so a balloon set today may not match the market in four years.
• Contract hire return charges. Excess mileage, damage and missing equipment are charged at the end, so budget for them.
• Personal guarantees. Newer operators and sole traders are commonly asked for one. Borrowing of £25,000 or less by sole traders and small partnerships can be regulated consumer credit, which brings additional protections.
• Tax. New HGVs bought through hire purchase may qualify for capital allowances in full; leases are treated differently. Ask your accountant before choosing.