What is business car leasing?
Business car leasing or business contract hire (BCH) is a valuable way for a business to get access to a car without buying the asset outright. This type of car finance lets you lease a vehicle for your business for a particular number of months (according to the agreement). And eventually, return it to the finance company at the end of the contract.
So, how does a business contract hire work? What is the corporate car leasing process? Here is our ultimate guide with everything you have ever wondered about leasing a car for a business.
How does business contract hire work?
Business contract hire is essentially the business version of personal contract hire (also known as PCH). The company has sole use of the car for the duration of its contract. Still, the vehicle is the property of the leasing company. Business contract hire agreements are helpful because they reduce the financial risks of owning a car (like depreciation costs, maintenance and servicing).
Leasing a commercial car gives businesses access to many brand new high spec cars with little upfront costs. However, cars have the unfortunate downside of losing their value. A car can lose around 25% - 30% of its overall value in its first year. Suppose you intend to buy a new vehicle to sell in the future. In that case, this depreciation can reflect a significant loss, whereas, with a business lease, this risk is taken out of the business hands.
There are limits to who can take out a business contract hire agreement. A business must have a credit score that the funder considers sufficient and can prove they can afford the rental payments. You will need to be running a business of some kind and registered as either a limited, public limited company, partnership, sole trader or charity to benefit from this type of car finance.
When applying for BCH, the selected funder will assess the businesses credit. They will use credit reference agencies such as Experian to help their decision. Companies may also have to provide funders with further documents such as bank statements, management accounts and the latest full accounts.
Business car leasing is growing massively (as an industry). The British Vehicle Renting & Leasing Association (BVRLA), for instance, recently reported that the leasing market in the UK has grown to a vast 1,350,000 customers – an average annual increase of 7.6%.
How does business car leasing work?
At CVC, we like clarity, so we break down how business car leasing works using a straightforward example:
John runs a musical instruments store and wants to lease the latest BMW 5 series to use as a company car for his visits to suppliers and stockists around the country. He finds an affordable deal on an online car leasing comparison tool and then reaches out to the broker.
The broker agrees on a rental plan with John based on a three-year contract. He also stipulates the initial rental and the annual mileage allowance. The broker asks John to go through some identity checks to prove he is a genuine business owner and that he is the person he is purporting to be. He has to undergo a credit check too, so the broker can rest assured that John's business will keep up with the rentals.
Once these checks are all complete and John is approved, the broker orders the vehicle. On delivery to John, he enters the payment plan stage.
These payments go towards paying off the depreciation costs of the car. The initial rental is subtracted from the guaranteed minimum future value of the vehicle, and the remainder is divided evenly amongst the number of months in the contract. In addition, John's road tax and optional maintenance package are included in the costs (for extra peace of mind).
During the contract agreement, John and the company use the car as their own. Still, they won't ever become the registered keeper or owners. Suppose John's company doesn't keep up to date on the monthly rentals. In that case, he risks having the car repossessed and the company's credit rating tarnished. Read more about credit score in our blog.
Fast forward three years, and John receives a reminder from the broker that his contract is drawing to a close, where he arranges to return the car. He has not exceeded his annual mileage allowance or damaged the vehicle beyond the confines of the fair wear and tear guidelines. So the broker will not request him to pay out any extra costs. He is free to look for a new car lease. To keep his custom, the broker might offer him a good deal.
Claiming back the cost of BCH with tax
One of the significant advantages of commercial car leasing is that you can claim back some aspects of tax.
You can claim the cost of the monthly rentals back as a business expense. You can also claim 50% VAT of the lease agreement rental back, so it is worth considering financing the car with your business.
It is also worth bearing in mind that you will be able to claim 100% of the VAT back due against any maintenance package added to your lease agreement.
What are the benefits of leasing a business car?
Why are so many people signing up for a business car lease? The simple answer is that there are just so many benefits:
- Fixed monthly payments - leasing offers fixed motoring costs, improves cash flow, and provides peace of mind for the business owner.
- Minimal capital expenditure - with low initial and monthly rentals, leasing offers minimal capital expenditure for businesses looking to drive new vehicles and expand their growth.
- No depreciation risk - most cars lose between 50-60% of their value during the first three years. However, by leasing, the risk is taken on by the funder.
- Brand new cars - when leasing, you get a factory-fresh model. As most leases only last a few years, you can drive a new car regularly, benefiting from an ever-improving standard spec and safety.
- VAT recoverable - You can claim 100% of the VAT back if the vehicle is solely for business use or 50% if the car also has some private usage.
- Full warranty - all vehicles come with a full manufacturers' warranty and typically cover the entire period of your lease for extra peace of mind.
Is business car leasing suitable for my business?
Deciding if a business car lease is right for your business will depend on your unique circumstances and what you need in a car. If your business needs a fleet of vehicles, business car leasing can be advantageous. You can potentially get your hands on £100,000s worth of vehicles in an instant for low monthly rentals.
If you only need one car and intend to sell it down the line, leasing probably is not the best option for you. Instead, we recommend going through the above list of benefits and checking if anything stands out as a 'must-have' feature. If you find more than one, probably leasing is the correct route for you to take.
Is business car leasing suitable for my business?
We have a wide selection of cars on offer. Take a browse on our top car leasing deals page and when you are ready, click the enquire now button. One of our expert sales agents will get in touch and quote you on the vehicle of your choice.
With millions of deals updated regularly, Commercial Vehicle Contracts has a revolutionising way to help you lease a car. Alternatively, start chatting with us on our live chat feature or call our head office on 01424 863456.
CVC are here to help every step of the way.
If you need help give us a call on:
01424 863 456 Head Office
020 3627 1127 London
0161 820 7808 Manchester
0121 314 2364 Birmingham
0117 911 0410 Bristol