Are you considering leasing for your business but unsure about the benefits, how it works, or need a better understanding overall? This guide is here to help.
Whether you’re looking to grow your fleet looking for a car for the day-to-day business or a sole trader in need of a van then business leasing is the best route and has many of its advantages and benefits you may not be aware of. First business leasing is an extremely popular financing option across various organisations, companies, partnerships, SMEs and sole traders.
So here is a guide to business leasing explaining all the pros and cons that come with it.
Firstly, business leasing, which can also be known as Business Contract Hire (BCH) is a long-term rental agreement of a brand-new vehicle for a set period of time this does tend to be between 12 and 48 months long. Within this contract, you agree on an initial rental and an annual mileage amount you will do for the period of your vehicle lease.
What are the Benefits of business car leasing?
There are many benefits and a few you may not be aware of, take a read and see if business leasing is something you should do for your business.
- The vehicle can be used by employees for personal use not only business giving that extra flexibility.
- Leasing is a fixed cost after the initial payment which can be tailored to your budget. The fixed cost can be spread over as many months as you choose in your agreement, making budgeting that is easier as maintenance can be added to this post, so you won’t have to factor in MOT and service or wear and tear.
- Better cash flow to your business as buying is more capital intensive, business leasing is just an additional line of credit that allows you to free up more money to invest in your business and not have cash flow worries.
- Great employee incentive offering a brand-new car that is electric as well is a great benefit for many employees it can help improve employee retention and attract top talent. This is something salary sacrifice is very good at doing.
- Drive a brand-new vehicle at an affordable fixed monthly cost. It can depend on the length of your contract be driving a brand-new car every couple of years. So, you can benefit from the vehicle car industry when comes to tech safety and luxury. Can also get one with low CO2 levels or zero emissions which reduces BIK on the vehicle as it is based on the emissions of the vehicle.
- Don’t worry about the depreciation value of the vehicle, the car loses the most amount of its value when it is driven for the first time, so you won’t have to worry about this as you won’t own it at the end and will be giving the vehicle back and then can lease another brand-new car.
- Limited companies can receive up to 100% of the payments and VAT against their corporation tax if the vehicle is just for business use or up to 50% of the car used for some private usage.
Get your vehicle delivered right to your front door for free.
Get any make, any model, brand new vehicle.
Includes maintenance payments, so you don't have to worry about keeping your car in top condition.
What are some of the negatives of leasing?
But leasing is not for everyone and there may be drawbacks for some when it comes to leasing making it not the perfect fit for some businesses.
- One that may be the biggest is the mileage restriction. When you agree to your lease contract you have to agree on you are annual mileage usage this then can change your monthly fixed cost as well as the value of the car. However, this does mean if circumstances change and do a lot over the mileage agreement you then get charged excess mileage which varies from vehicle to vehicle. But can halfway through your lease change the mileage if you feel you are either going under or over the agreement.
- With leasing at the end of the agreement you do not own the vehicle this is common with the majority of brand-new lease vehicles. However, you can ask for a purchase price at the end of the lease and some may give it however this is not always guaranteed.
- Another issue that may be more for the employees is the company car tax as most will use the vehicle for both personal and business use, they will have you benefit in kind tax on the vehicle which goes to HMRC. There is a calculation to work this out but the cost of the vehicle and the CO2 levels of it have an impact on the vehicle. Electric vehicles are the lowest for BIK can be a very small contribution howler as the emissions rise so does the tax you have to pay for the vehicle which can make it constantly more expensive.
What types of businesses can lease?
- VAT registered companies
- Partnerships
- Sole Traders
- Private Limited Companies
- Limited Companies
- Limited Liability Partnerships
- Charities
Types of business contract
There are various different types of business leasing contracts, and some may suit you and your business needs better:
Business Contract Hire
Business contract hire is a long-term agreement that allows a business to lease a vehicle, but you do not own it. The agreement length tends to be between 12 to 60 months. At the end of the agreement, the vehicle is just returned. It is suitable for sole traders, companies and partnerships. Business contract hire is a great option for man VAT registered companies as you can claim back up to 100% of the payments if the vehicle is solely for business use or up to 50% off if the car is being used for private use along with the business. Contact hire takes the worry of depreciating asses off your balance sheet as just give it back at the end of the lease agreement and car get another brand-new vehicle.
Business Contract Purchase
Business Contract Purchase is a great option for your business if you want to own the vehicle but don’t want the responsibility of a depreciating asset. Business contracts purchase you get a brand-new vehicle and pay an initial rent which can choose the amount, which then follows fixed monthly payments for the duration of your lease agreement which you would agree upon the length of it.
Business Lease Purchase
A business lease-purchase agreement is ideal if your company wants to own a vehicle expected to retain or increase in value but can't afford an upfront payment. This financing option allows for monthly payments based on the vehicle's initial and future estimated values, with a final balloon payment at the end. While the total VAT must be paid upfront and can be offset against quarterly VAT returns, it is only reclaimable if the vehicle is used exclusively for business purposes.
Finance Lease
A Finance Lease is a leasing option that provides tax benefits and flexibility for businesses needing multiple vehicles without the upfront costs. This arrangement allows you to choose between two payment methods:
- Lower Monthly Payments with Balloon Payment: You can opt for lower monthly rental payments with a final "balloon" payment based on the estimated resale value of the vehicle.
- Full Cost Payment Over Time: Alternatively, you can spread the total cost of the vehicle, including interest charges, over an agreed period.
Throughout the lease term, the vehicle remains the property of the finance company, and ownership does not transfer to you. This leasing option is ideal for businesses looking to manage cash flow effectively while accessing necessary vehicles.
Is my business eligible for car leasing
To lease a vehicle, your business will need to undergo a credit check as part of the financial application process. The finance provider uses this information, along with details from your application, to decide whether to approve your lease. A good credit report improves your chances but doesn’t guarantee approval, especially if your business is less than two years old. In such cases, you might need to provide additional documentation, such as a director's guarantee and management accounts, or consider a larger initial rental payment. This extra scrutiny helps the finance provider assess the potential risks associated with your business.
What financial information will I need to provide?
When applying for a finance lease, you will need to provide various pieces of information to support your application. Here is a list of the necessary details:
- Company Bank Details
- Director Details
- Name
- Address
- Date of birth
- Marital status
- Company Details
- Registered name
- Registered address
- VAT registration number
- Annual turnover
If your initial application is declined, additional information may be requested, such as:
- A Director’s Guarantee
- Three months of business bank statements
Providing accurate and comprehensive information will help streamline the application process and improve your chances of approval.
If you want to learn more or start the process of leasing a vehicle, please give us a call or send us an email. We are happy to answer any questions and assist you in any way we can.
