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Business Leasing Explained

Thinking of leasing a car for your business? Whether you're a large corporation looking for a fleet of vehicles for your sales staff, or a sole trader looking for a van to conduct your day-to-day business, business car leasing offers many advantages versus buying a new car via a bank loan or dealer finance.

To help you understand everything you need to know about business car leasing, Nationwide Vehicle Contracts has put together a comprehensive guide explaining the benefits and drawbacks of business car leasing, as well as the different types of business leasing contracts available.

man driving business lease car

What is business leasing?

Business car leasing is a long-term rental agreement designed for all types of businesses, including sole traders, partnerships and limited companies. There are five different types of lease contracts available for businesses, including Business Contract Hire, Business Contract Purchase, Finance Lease and Business Lease Purchase. Each contract type is different and the best choice for your business will depend on your specific needs and circumstances.

How does business car leasing work?

With a business car leasing contract, you decide on which vehicle you’d like to lease, then agree to an initial rental and annual mileage amount, and how long you want to lease the car for. Your business will then undergo a car lease credit check to see if you are financially eligible. At the end of the lease contract (depending on the type of contract taken out), the vehicle is returned to the finance provider.

What are the benefits of business car leasing?

Business car leasing has become increasingly popular with businesses of all sizes who are looking to obtain company cars because of its many benefits. 

Benefits of choosing a business car leasing contract include:

  1. Fixed monthly rentals

    Leasing offers fixed, affordable monthly rentals which can be spread over an agreed period of time. This makes budget planning easier, while contract and mileage terms are flexible to suit your business requirements.

  2. Better cash flow

    Unlike buying, which is capital intensive, business leasing is an additional line of credit, meaning you can free up money to invest in your business and ease any cash flow worries.

  3. No depreciation risks

    According to the Money Advice Service, the value of a vehicle typically decreases between 15-35% in the first year and up to 50% or more over three years. However, by leasing, the depreciation risk is taken on by the vehicle’s finance provider so you don't have to worry about the depreciation or disposal of the vehicle at the end of the contract.

  4. Brand new vehicles

    With a business leasing contract, you have the option to change your vehicle every two to four years, benefiting from new luxury car lease deals, ever-improving technology, security and safety features found on new vehicles.  

  5. VAT recoverable

    Limited companies can recover up to 100% of the payments and VAT against their corporation tax if the vehicle is solely for business use or up to 50% if the car has some private usage.

  6. Easy maintenance

    Maintenance and servicing can also be included in the monthly rental, helping to spread the cost and minimise downtime for drivers. Plus, if you chose to take out a maintenance package with your company vehicle, you can claim up to 100% back on that too.

What are the drawbacks of business car leasing? 

As with most financial contracts, there are some drawbacks that you must be aware of before deciding if business car leasing is suitable for you and your business. 

Drawbacks of business car leasing include:

  1. Mileage restrictions

    When signing for the business lease, you pre-agree to an annual mileage amount. If you exceed this pre-agreed mileage, you will be liable for excess mileage charges which can prove costly. 

  2. Fair wear and tear

    You need to return the car in good condition and within fair wear and tear guidelines. This means you and any employees must keep the vehicle in good condition. Any damage to the vehicle beyond the BVRLA fair wear and tear guidelines means you may be liable for damage charges. Check out our Leasing Wear and Tear Guide for more information.

  3. You won't own the vehicle

    Depending on the type of lease contract, most new car lease deals don’t offer an ownership option so you will not own the vehicle at any point during the contract.

  4. Early termination fees

    If you choose to cancel your lease agreement early because you no longer need the vehicle, you will have to pay early termination fees.

  5. Company car tax for employees

    In some cases, it can be considerably more expensive for employees to take a company car than it would be to personally due to company car tax. Keep in mind that the higher the CO2 emissions of the vehicle, the higher the company car tax will be, therefore it is important to choose a vehicle with low CO2 emissions for lower BIK rates.

What are the different types of business lease contracts?

Business Contract Hire

Business contract hire is a long-term vehicle rental agreement suitable for limited companies, partnerships and sole traders. It's an excellent option for 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% if the car has some private usage. It's essential to understand that your company won't own the vehicle at the end of the contract, however, contract hire eliminates having a depreciating asset from your company's balance sheet.

Business Contract Purchase

Business Contract Purchase is ideal for businesses who want to own their vehicles and avoid the risk of having depreciating assets. Your company selects a brand new vehicle, pays an initial rental, followed by fixed monthly instalments throughout the length of the contract. With business contract purchase, at the end of the contract, your business has the option to purchase the vehicle for a pre-agreed price.

Finance Lease

Finance lease is great for businesses, where contract hire is not suitable. This type of leasing offers flexibility and tax advantages to companies who require one or more vehicles but don't have the money to pay for them upfront. 

You can choose to pay either a lower monthly rental with a final payment based on the estimated resale value of the vehicle (balloon payment). Alternatively, you can pay the entire cost of the vehicle, including interest charges, over an agreed period. Throughout the agreement, you don't own the vehicle as it remains the property of the finance company.

Business Lease Purchase

Business Lease Purchase is a lease agreement designed to offer dedicated vehicle funding if your company eventually wishes to buy the vehicle, but doesn’t want to spend the money up front. Lease purchase is essentially a finance package and does not include maintenance or other added-value services, such as those offered when taking out a contract purchase agreement.

What types of businesses can lease?

Business car leasing is intended for the following business types:

  • VAT registered companies
  • Sole traders with a bank account in the sole trading name
  • Partnerships with two or more partners working in the business
  • Limited Companies
  • Private Limited Companies
  • Limited Liability Partnerships
  • Charities

Is business car leasing suitable for my company?

While business car leasing is suitable for most businesses, it is important you consider your needs and circumstances before deciding if it's right for you. 

Business car leasing can be beneficial if your business needs a fleet of vehicles as the low monthly payments usually associated with leasing means you can acquire a number of vehicles over an affordable period. Unlike buying, which is capital intensive, business leasing is an additional line of credit, meaning you can free up money to invest in your business and ease any cash flow worries. 

Business leasing, however, may not be suitable for businesses with extraordinarily high mileage as it can be expensive. Businesses who wish to use the vehicle for "Hire & Reward" purposes will also not be eligible. This includes Taxi, Chauffeur, Driving Schools and Rental companies.

Check out our Pros and Cons of a Company Car guide for more information on whether business car leasing is suitable for your business.

dealership passing keys to business driver

Is my business financially eligible for car leasing?

In order to lease a vehicle, your business will need to undergo a credit check as part of the finance application process. Finance providers use this credit check information and details on your application to make a final decision. A good credit report is not the sole factor to being eligible for business leasing but can play a part in your chances of getting accepted for a business lease contract.

If your business is less than two years old you might be asked to produce additional paperwork such as three months’ business bank statements, a director's guarantee (ltd companies only) and management accounts (if available). Occasionally, a larger initial rental may also be required. This is because it is difficult for the finance provider to gain insight into the business and the potential lending risks involved. 

What financial information do I need to supply about the business? 

When applying for a business lease contract, you will have to fill out a business finance application form. You will be asked to provide the following information: 

  • Company details such as registered name, , registered address, company registration number, VAT number (if applicable) and annual turnover
  • Director details including their name, address, marital status and date of birth
  • Company bank details including bank name, sort code and account number
If you have previously been denied vehicle finance or if the business being less than two years old, you may be asked to provide some additional information such as:

  • Three months' business bank statements
  • Management account
  • A director's guarantee
Take our brief interactive Is Your Business Eligible for Finance questionnaire below to determine if your business is likely to be accepted for finance. 

What are the tax advantages of business car leasing?

One of the biggest advantages of business car leasing is the positive tax implications. Monthly instalments' cost can be claimed back as a business expense, along with car road tax and fuel, but the total amount you claim will depend on the vehicle's emissions.

If you intend to use your leased vehicle solely for business, you can claim back up to 100% of the VAT. However, If you want to use the vehicle for personal use, you can only claim back up to 50% of the VAT. It's essential to keep in mind that you can also claim up to 100% of the VAT if you choose to take out a maintenance package with your lease agreement.

Who pays for car insurance - the company or the employee?

With a business lease, the company covers all insurance costs and, in some cases fuel costs. The insurance certificate needs to be in a director's name or the company name. If an employee is expected to drive the vehicle, a letter on company headed paper may be needed. This confirms that the employee is authorised to drive the vehicle and to verify his/her position in the company. 

Your new vehicle lease hire needs to be insured from the day of the delivery and must remain insured until the finance provider collects your vehicle. Proof of insurance is required before delivery can take place. This must be a fully comprehensive insurance policy, and the certificate must show your name, registration number, and date on or before your delivery date.

If your business owns multiple vehicles, you may want to look at fleet insurance as it can also be tailored to your business demands and save you money in the long run. 

Can I buy the vehicle at the end of the contract? 

With a Business Contract Hire and Finance Lease, you don't have the option to buy the vehicle at the end of the lease contract. However, with a Business Contract Purchase and Business Lease Purchase, you can take ownership of the vehicle at the end of its contract. 

How do I apply for business car leasing? 

If you think business car leasing is right for you, browse our range of business lease deals to choose from a wide range of vehicles. You'll need to tell us your estimated annual mileage, preferred initial rental and contract length. Road tax is included in the cost, so you don't need to worry about paying for that separately.
You can also choose to add maintenance to your monthly payments. This will cover any mechanical or electrical repairs, servicing and more, potentially saving you money in the long term. You can also claim up to 100% of the VAT if you choose to take out a maintenance package with a business lease deal.

Once you've agreed to your contract, we'll deliver your car to your front door for free (exclusions apply). Your monthly payments will then start, allowing you to drive and enjoy a brand new car for the length of your agreement.

For more information on the different types of business leasing offers, check out our comprehensive guides on Business Vehicle Leasing or call Nationwide Vehicle Contracts on 0345 811 9595 for expert advice.
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