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.
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.
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.
Business car leasing has become increasingly popular with businesses of all sizes who are looking to obtain company cars because of its many benefits.
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.
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.
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.
With a business leasing contract, you have the option to change your vehicle every two to four years, benefiting from ever-improving technology, security and safety features found on new vehicles.
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.
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.
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.
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.
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.
Depending on the type of lease contract, most lease agreements don’t offer an ownership option so you will not own the vehicle at any point during the contract.
If you choose to cancel your lease agreement early because you no longer need the vehicle, you will have to pay early termination fees.
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.
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 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 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 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.
Business car leasing is intended for the following business types:
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.