Business car leasing versus buying
- How does business car leasing work?
- What are the advantages of business car leasing?
- How do you buy a car through your business?
- Business car leasing vs business car buying
If you’re looking at getting new vehicles for your business, it’s likely that you’re also trying to decide whether you would be better off leasing or buying.
Over the last few years, leasing has grown in popularity. It’s a great way to get new cars, especially for businesses. However, it’s fair to say that buying also has advantages.
In this article, we’re going to look at both business leasing and buying to provide you with the information you need to decide which option is the better one for you and your business.
How does business car leasing work?
Firstly, let’s look at how business car leasing works.
As a business, there are three different types of lease contract available to you. They are:
- Business Finance Lease
- Business Contract Hire
- Business Operating Lease
How does Business Finance Lease work?
Business Finance Lease, or just Finance Lease, is popular with companies where they know that the vehicles will be doing incredibly long journeys regularly and therefore a mileage restriction would be problematic. Long journeys also increase the possibility that the vehicles will experience damage that will fall outside the standard required by the BVRLA’s fair wear and tear. It’s also something that can be good if you need to convert your vehicles, such as if you are going to require refrigeration units.
With a Finance Lease, you pay a fixed monthly fee for a set period of time. Once the time is up, you are responsible for selling the vehicle on. You find the buyer, introduce them to the Finance House and the buyer then pays them the agreed price directly. That lump sum goes towards the final balloon payment. If you are able to sell the vehicle for more than the value of your balloon payment then you get the equity that you can then put towards a new vehicle. If, however, it is not enough to cover the full sum then you will be responsible for making up the difference.
It’s worth noting that the lease company will often charge a small administration fee of between 0.5% and 2.5% for processing the final payments.
You also have the option to pay a small fee (usually equal to the value of 1 months’ payment) to keep the vehicle for an additional year. This payment is often called a Peppercorn rental.
How does Business Contract Hire work?
Business Contract Hire is actually the most popular form of business leasing available. If you hear people talking about leasing then this is normally what they mean.
With a Business Contract Hire, you have the car for a set period of time and make monthly payments for the duration of your contract. When the agreement comes to an end, you simply hand the car back and there is nothing else for you to pay (though this is subject to mileage and condition restrictions). The payment of your annual Vehicle Excise Duty is normally included in the terms of the agreement – and depending on the vehicle and its CO2 emissions, this can be a saving of over £2,000 in the first year.
How does Business Operating Lease work?
This is the first and original lease scheme that was set up for businesses. However, it’s something that you won’t come across often any longer. Apart from in rare circumstances, Mercedes is the only one that now offers this type of agreement.
It works in the same way as Business Contract Hire, apart from the fact that Vehicle Excise Duty is only included for the first year. After that, you’ll be responsible for ensuring that it’s paid on time.
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What are the advantages of business car leasing?
There’s a reason why business car leasing is so popular, and that’s because there are so many advantages. For example:
- You can lease luxury cars for less money as you only really pay for the depreciation when you’re leasing a car. This means that the amount you pay for monthly payments will be much less than if you purchased the vehicle outright
- You (and your employees) can get a new car every few years, which can be great for employee morale as well as potentially present a good first impression of your business
- There is no need to be concerned about depreciation, your money won’t be tied up in an asset that is losing value
- If your company is VAT registered then you can claim 50% VAT back on the monthly payments. If you’re leasing a van you can claim 100% of the VAT back.
- If you’re using your company car for personal journeys then you can claim the monthly cost of your lease against profits, though the percentage you can claim depends on the CO2 emissions of your company vehicle. If it leases less than 110g/km of CO2 then you can claim 100% back, anything over that then you can claim 85% back
- Financial commitments related to Business Contract Hire can be “off balance sheet”, which means that the liability of the finance doesn’t appear on your company accounts.
What are the disadvantages of business car leasing?
As with most financial agreements, there are some disadvantages to business car leasing and it’s important that you are aware of these before you make any decisions about your new vehicle finance. These include:
- If you get a vehicle on a Business Contract Hire or Operating Lease then you have to consider mileage restrictions and fair wear and tear standards. This means that you (and any employees with a company car) will need to stick within pre-agreed mileage ranges and keep the vehicle in good condition. If you ignore either of these then you will face extra charges at the end of your agreement
- Your monthly payments are costs you will need to think about every month. If you’re someone who doesn’t want to think about monthly arrangements then leasing isn’t for you
- If you get a Finance Lease you will be responsible for selling the vehicle on at the end of your contract which can be somewhat time-consuming and you may still be responsible for an additional payment if you are unable to sell the vehicle on for the price of the balloon payment.
Who can get a business car lease?
Now that we have talked about what business car leasing is and the pros and cons, it’s important to know if you actually qualify for one. So, are you eligible?
You qualify to get a business car lease if you:
- have a limited company
- are a sole trader
- are in a partnership with less than 4 partners
If you are a VAT registered business then there are additional benefits that we have mentioned in the advantages of business car leasing.
Interested in finding out more about leasing? Download our up to date information about the leasing options available.
How does buying a business car work?
So, you may have decided that leasing your business vehicle just isn’t for you, and that’s okay as it’s not an arrangement that suits everyone. If you’re looking at buying a car through your business instead of leasing then here are some of the key things you should be aware of.
How do you buy a car through a business?
If you’re buying a vehicle through your business then there are two ways that you can do this:
- Hire Purchase
- Cash Purchase
How does Hire Purchase work?
Hire Purchase works in a similar way to leasing. At least in the sense that you pay a monthly fee for a set period of time, which can be anything up to 5 years. However, once that time is up you own the car with nothing more to pay.
How does Cash Purchase work?
This is pretty self-explanatory, to be honest. A Cash Purchase is when you pay for the vehicle outright, without the need for a finance agreement of any type. You can either do this using cash from your bank account or via a bank loan.
What are the advantages of buying a car through a business?
If you decide to purchase your business vehicle then there are several advantages, these are:
- You are not restricted by mileage ranges or condition standards as you own the vehicle
- If you own the car outright because you’ve purchased it with cash then you won’t have to worry about making monthly payments (unless you got a loan to make the purchase, of course)
- If you get your vehicle with a Hire Purchase agreement you can extend the length of your agreement to five years, this means that you can lower your monthly payments should you wish
- There are no monthly payments on your company accounts, at least if you own the cars outright. You won’t have the liability of the cars on your company accounts
- There are no contracts if you use Cash Purchase. If you have a Hire Purchase agreement then you can end your contract at any point, though you will need to pay the balance in order to do so
- You own the car(s) outright.
What are the disadvantages of buying a car for business?
With the positives come the negatives, so we need to make sure you’re aware of the disadvantages of buying a car for your business in order for you to make an informed decision.
- Depreciation is something you need to think about. It’s the biggest disadvantage when you purchase a vehicle whether for yourself or your business
- Vehicle disposal. When you lease you can hand the vehicle back (or find a buyer) when the contract ends. However, if you own the vehicle you have to think about selling it on when you no longer need it
- No matter the vehicle, if you’re considering a Cash Purchase then it is a lot of money to part with all at once.
- There won’t be many businesses that can afford to replace their entire fleet every few years when purchasing for cash.
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Business Car Leasing vs. Business Car Buying
After all that, which of the two options is better?
It really depends on what you want and what your business needs are. If you want to own your vehicles, then naturally you should buy them. Likewise, if making monthly payments are something you want to avoid then we’d recommend you look at the Cash Purchase option.
If, however, you like the thought of being able to refresh your fleet every few years and potentially having access to more luxury vehicles for a lower price then leasing is the perfect choice for you.
Ultimately, it’s down to which option is best for your situation. Everyone is different and every business has different requirements.
In conclusion, there are pros and cons to both leasing and buying for business. There are tax benefits to leasing your car through a business, but you won’t get to own it. Similarly, you have no mileage or condition restrictions if you buy, but you don’t get a new fleet every few years.
Buying and leasing are very different options that have different advantages and disadvantages, so it depends completely on your individual and business situations and requirements.
Hopefully, this has given you some idea and helped you on your way to making an informed decision.