There have been many reports in the media over recent months with scary headlines such as “Is Britain’s Car Finance Market Heading For Scandal?” And “Sub-Prime Cars: Are Car Loans Driving Us Towards the Next Financial Crash?” that may be making small and medium businesses think twice about using a form of leasing for their car and van needs. Many of these articles do not fully, or in some cases correctly, describe products available, or the benefits an SME may experience from using them. Hopefully, this article fully explains the options open to businesses.
There are three main options for sourcing a business vehicle: business contract hire, business finance lease, or a purchase option (hire purchase, lease purchase or contract purchase). These products have several financial benefits for businesses, all mean a lump sum investment of money is not necessarily needed to acquire a single car or van or even a fleet of vehicles. A small initial outlay followed by a regular monthly commitment means there is more capital left for a business to invest and drive growth in other areas. For businesses who are VAT registered there are also some other financial benefits that may apply.
Further benefits to a business may include; time saving, as the processes of vehicle sourcing, ordering and disposal are taken care of by the leasing company. Image, a new vehicle helps your company appear successful and thriving to potential customers. Safety, for the protection of those driving the company vehicle new models offer the latest in safety technology. Whole life costs, new vehicles are the most fuel-efficient so may save on the company’s fuel costs as well as reducing the company’s carbon footprint.
The needs of your business will determine which finance product will serve you best. There are differences in the benefits and points to consider for each product.
1. Business contract hire
With business contract hire the company enters into a contract with a Leasing Company. The company pays an initial rental followed by fixed monthly rentals for full use of the vehicle for a contracted period of time. The company must state how many miles per year they expect the vehicle to cover as this residual information is used by the leasing company when calculating the rental amounts.
| Benefits of business contract hire | Points of consideration |
| Road tax costs will be included in the monthly rental based on current rates | Your company will never own the vehicle |
| Small initial outlay and a fixed monthly commitment helps with cash flow management | Exceeding agreed mileage limits will lead to an excess mileage charge when the vehicle is returned at the end of the lease |
| Opportunity to drive vehicles with the latest technology and the most fuel-efficient engines | Comprehensive insurance must be sought and paid for separately to monthly rentals paid |
| No concerns about depreciation of an asset or disposal of the vehicle | There will be no option for your company to purchase the vehicle when the lease ends |
| Flexible terms mean you can tailor the length of the contract and the miles per year to suit the needs of your business | Your vehicle must be returned in acceptable condition in line with the BVLRA’s fair wear and tear guidelines. Any damage outside of these guidelines must be rectified before the vehicle is returned, or you will be charged for repairs by the leasing company |
| In most circumstances where a car is used for both business and personal mileage, 50 per cent of the VAT element can be reclaimed. | It can be expensive if you wish to terminate your business contract hire agreement early |
| A maintenance contract can be taken to account for servicing and replacement of wear and tear items (including tyres), leaving no unexpected costs | If you do not keep up with repayments the finance company can repossess your vehicle. |
| A contract hire vehicle does not appear as an asset on a company’s balance sheet |
2. Business finance lease
With a business finance lease, your company pays a monthly rental to a leasing company for the use of a vehicle they have chosen. This rental is made for a contracted period of time. At the end of the contract the company must pay the balloon rental (if applicable) to the leasing company. The vehicle must then be sold to a third party. If there is any profit made from the vehicle sale your company will be given a share. If you wish to continue leasing the vehicle after the initial rental period, you will enter into a secondary rental period also known as a ‘peppercorn rental’.
| Benefits of business finance lease | Points for consideration |
| Small initial outlay and a fixed monthly price helps with cash flow management | Your business will never own the vehicle as it must be sold to a third party at the end of the contract |
| Vehicle can be shown as an asset on your balance sheet | If you do not keep up with repayments the finance company can repossess your vehicle |
| There are no mileage restrictions or charges for damage to the vehicle at the end of the contract | If the vehicle condition is poor, or mileage is higher than initially anticipated, then this will have a negative impact on sale price |
| In most circumstances where a car is used for both business and personal mileage, 50 per cent of the VAT element can be reclaimed. | Traditionally, finance lease agreements do not include the cost of road fund licence |
| If a profit is made when the vehicle is sold at the end of the contract your company may receive a share of any equity | Maintenance option are only available with selected funders |
| Rentals can be structured to suit your business by making lower monthly rentals with a larger balloon, or larger monthly rentals with a lower balloon at the end of the contract. | Check the percentage of refund of sale proceeds before entering into a contract |
3. Business hire or lease purchase
With purchase options, your company will enter into a contract with the finance company. The finance company will be the party that hold title to the vehicle. Your company will then make monthly payments to the finance company to cover the total value of the vehicle (plus any agreed interest charges). When all payments have been made, your company will own the vehicle.
| Benefits of purchase options | Points for consideration |
| Monthly payments made will not be subject to VAT | Your company will not own the vehicle until the final payment has been made |
| Your company will own the vehicle when all payments have been made | For Hire Purchase and Lease Purchase there is no option to hand back your vehicle, the final payments must be made |
| Unless you opt for a contract purchase agreement with a guaranteed balloon payment, there will be no mileage restrictions or damage recharges | The vehicle cannot be sold until the final payment has been made as the asset is owned by the finance company |
| The vehicle can be listed as an asset on your company’s balance sheet | If you do not keep up with repayments the finance company can repossess your vehicle |
| A fixed monthly fee helps with cash flow management | For contract purchase options, mileage and condition restrictions may apply |
| Flexible deposits and contract lengths typically between two to five years, mean you can match your agreement to the needs of your business | |
| Some finance company’s offer cost effective maintenance contracts offering further budget control |
If you would like further information regarding which option would be best for your business vehicle needs, you should seek impartial advice from a leasing company regulated by the Financial Conduct Authority.
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