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Guide
Business Contract Hire
Business car and van leasing (or business contract hire/BCH, as it used to be called) offers distinct business benefits and is by far the most popular form of lease financing today.
Business Finance Lease Explained
A Business Finance Lease is similar in some respects to car or van leasing in that it’s a long-term rental arrangement where your business leases a vehicle(s) of its choice for an agreed length of time, at a set fee. With finance lease however, when the contract ends your business has two options.
What is Business Finance Lease?
The first option is for your business to advertise and find a buyer for the vehicle, then connect this buyer with the finance lease company who will take over the purchase process. The alternative is for the finance lease company to simply auction the vehicle. When the vehicle is sold, the finance company pays off the remaining amount owing on the vehicle (i.e. the ‘balloon’ payment). If the car or van is sold for more than the outstanding amount due in the ‘balloon’ payment, your business is usually able to keep a percentage of this profit, this profit, however, must be shown on your business accounts as ‘profit’. If, however it is sold for less, your business must meet the shortfall and again, this figure must be shown on the business accounts. The second option at the end of the contract is for your business to pay a fee to delay the vehicle disposal process for a year (this is known as a ‘peppercorn’ option). After this period, the vehicle must be disposed of as described in the first option and the ‘balloon’ payment paid in full.
In summary, there is an initial payment or deposit followed by fixed, monthly payments. At the end of the lease term, the full amount outstanding must be paid. Your business must dispose of the vehicle and pay the ‘balloon’ payment amount due on the value of the car.
Business Finance Lease could suit your business...
Business finance lease could suit your business if it’s looking for a lower initial outlay, monthly payments and is willing to take a risk on the resale value of the vehicle when sold at the end of the contract. Your business must also be prepared to meet any shortfall in the resale price and be able to pay off the ‘balloon’ payment in full. It is a very common finance solution for vans that are heavily used through their life and may be in poor condition at contract end. Leasing these under a Contract Hire arrangement may attract extensive damage charges
Benefits of Business Finance Lease
- There is no large down payment, only a fairly small deposit/initial payment
- Monthly payments are typically fairly low
- Deferment of monthly payments may be possible, to suit businesses with variable cash flow
- 50% of VAT paid on car finance lease payments is reclaimable (by VAT registered businesses), and 100% reclaimable for vans
- The VAT paid on a maintenance package is 100% reclaimable (by VAT registered companies)
- Cars with emissions at or below 110kg/km can reclaim 100% of the finance lease payments against taxable profits, cars at 111kg/km or above can claim back 85% and for vans, 100% of lease payments are reclaimable
- Your business may be eligible to keep a percentage of any possible profit you may make when you sell the vehicle at the end of the contract (however any profit must be shown on your business accounts)
Things to consider
- Your business doesn’t own the vehicle and there is no option to buy it at the end
- Some finance lease companies do not fix their interest rates, leaving your business exposed to changing monthly costs
- Depending upon your finance lease company, your business may have the responsibility of finding a buyer for the vehicle at the end of the contract (unlike with business car/van leasing)
- There is an element of financial risk at end of the contract, because if the price the car or van is sold for is less than the final or ‘balloon’ payment, your business must pay the gap
- During the contract period, the vehicle must appear on your business accounts as a liability, which can limit your business’ ability to borrow other funds
- Road Tax is not included (unlike with business car leasing)
- As the finance lease agreement is based on the terms of contract and annual mileage, if the final mileage exceeds the original estimated mileage, your business must pay the difference
Information is provided as a guide only. Select Car Leasing cannot be held responsible for any personal or business decisions made as a result of information provided in the guides. As with all aspects of taxation, it is the responsibility of individuals and businesses to understand the rules and regulations and act accordingly. As personal and business circumstances can vary, it is also advised that you take professional accounting advice before making a final decision.
If you'd like to speak with our friendly team about business vehicle leasing, simply call 0118 920 5130 or email us at: enquiries@selectcarleasing.co.uk
We've got business car leasing covered from every angle
If you're thinking about business car leasing, we have a collection of informative guides on all aspects of business leasing to make the process as simple as possible.
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Guide
Business Contract Purchase
Business Contract Purchase is a long-term rental agreement. Suitable for businesses seeking a low initial outlay and the option to buy at the end of the contract.
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Guide
Business Lease Purchase
Business lease purchase is a rental agreement whereby the business makes an initial payment followed by fixed, monthly payments. At the end of the contract term, the business must purchase the vehicle.
