If you are looking at getting new cars for your business, you might be trying to decide between leasing or buying.
Leasing is an extremely popular way of getting new cars, particularly for businesses, but buying does also have many advantages.
In this article, we are going to compare business car leasing and buying, and help you decide which is best for you.
How does business car leasing work?
Firstly, let’s look at how business car leasing works.
There are three different types of business lease contracts available to you. Those 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 whose cars or vans are going to be doing excessive mileage or suffer from more than their fair share of wear and tear. Alternatively, this is good for those with conversion units, such as refrigeration units.
With a Finance Lease, you pay a fixed monthly fee for a set period of time. Once that time is up, you are responsible for selling the vehicle on. You will then introduce the buyer to the finance house and the buyer will pay the finance house the agreed price. That money will then go to your final balloon payment. If the vehicle has gone for more than the balloon payment, you get the equity, if it is less, then you will have to make up the difference. It should be noted that the lease company often has a small administration fee of between 0.5 and 2.5% for processing the final payments.
Alternatively, you can pay a small fee, usually one monthly payment (normally called a Peppercorn rental), to keep the vehicle for another year.
You can watch our video on Finance Lease below.
How does Business Contract Hire work?
This is the most popular form of business leasing, and tends to be what people are talking about when they talk about leasing.
Business Contract Hire is where you have the car for a set period of time while making monthly payments. At the end of the contract, you hand the car back with nothing else to pay (subject to mileage and condition restrictions). Road Fund Licence is normally included for the term of the agreement.
You can watch our video on Business Contract Hire below.
How does Business Operating Lease work?
This is the original lease scheme, but it’s pretty uncommon these days. Mercedes are really the only ones who offer this type of agreement.
It works in the same way as Business Contract Hire except road tax is included in the 1st year only. After that, you are responsible for paying for it.
So those are the different types of business lease that are available to you.
What are the advantages of business car leasing?
There is a reason business car leasing is so popular, and that’s because there are so many advantages. For example;
- You can lease “nicer” cars for less money
- When you lease a car, you really only pay for the depreciation. This means that the monthly payments will be less than if you were to buy your cars for your business.
- Prestige cars cost less than you think to lease
- This means that you and your employees could be driving around in BMW’s and Audi’s for much less than you might think
- This, in turn, raises morale and is great for company image
- You and your employees can get new cars every few years
- Again, great for morale and company image
- You don’t have to worry about depreciation
- You won’t have your cash tied up in a depreciating asset
- If you are leasing through a VAT registered company, then you can claim 50% VAT back on the monthly payments.
- And you can claim 100% of the VAT back if you are leasing a van.
- Even if you are using your company car for personal use then you can claim the monthly cost of the lease against profits
- The percentage of this depends on the CO2 emissions your car emits. If it emits less than 160g/km of CO2 then you can claim 100% back but anything over and you can only claim 85% back (which is still pretty good).
- Finance commitments on a Business Contract Hire can be “off balance sheet” so the liability of the finance doesn’t appear on the company accounts.
So those are some of the advantages of business car leasing.
What are the disadvantages of business car leasing?
However, there are some disadvantages. And, it’s important you know these before you make a decision. For example;
- With a Business Contract Hire and Operating Lease, you have mileage and condition restrictions
- This means that you and your employees must stick within a pre-agreed mileage and must keep the car in a good condition
- If you do not, then you will face extra charges.
- It’s a cost you have to think about every month
- If you don’t want to have to think about paying the monthly fee then leasing isn’t for you.
- With a Finance Lease, you are responsible for selling the car on
- This can be time consuming
- And, you might still have to pay for some of the balloon payment
- If you can’t sell your vehicle on for the cost of the balloon payment (or more) then you will have to make up that cost yourself
Those are some of the disadvantages of business car leasing.
Who can get a business car lease?
Now you know what business car leasing is and the pros and cons, who can actually get a business car lease?
You are eligible for a business lease contract if;
- You have a limited company
- You are a sole trader
- You are in a partnership with less than 4 partners
- Are a VAT registered business
That said, you don’t need to be a VAT registered business to get a business lease but if you aren’t, then you can’t claim the VAT back. Though you won’t be worse off because you can’t claim the VAT back on any other finance or purchase scheme.
How does buying a business car work?
You may have decided that business leasing isn’t for you, and that’s okay, it isn’t for everyone. So you might be looking at buying a car through a business instead of leasing. And that’s what we’re going to talk about in this section.
How do you buy a car through a business?
There are two ways you can do this;
- Hire Purchase
- Cash Purchase
How does a Hire Purchase work?
Hire Purchase works in a similar way to leasing. This is in the sense that you pay a monthly fee for a set period of time, up to 5 years. But, once that time is up, you own the car with nothing more to pay.
You can watch our video on Hire Purchase below.
How does a Cash Purchase work?
A Cash Purchase is pretty self-explanatory in the way that you simply pay for a car outright, without the use of a finance agreement. You can either do this with the cash in your bank or via a bank loan. You then pay the bank loan back over a period of time.
What are the advantages of buying a car through a business?
There are plenty of advantages to buying a car through a business. For example;
- There are no mileage and condition restrictions
- Because you are sure to own the car, there are no mileage or condition restrictions.
- You own the car outright if you go through a Cash Purchase
- This means that you won’t have to worry about monthly payments
- Unless you get out a loan, of course
- This means that you won’t have to worry about monthly payments
- If you choose a Hire Purchase, you can draw out the cost further
- A Hire Purchase can last 5 years, which means that you can lower your monthly payments even further if you wish
- You won’t have monthly payments on the company accounts
- This is if you buy the cars outright. You won’t have the liability of the cars on the company accounts.
- You aren’t bound by contracts
- If you buy your cars outright then there are no contracts to be worrying about
- If you have a Hire Purchase, then you can end your contract at pretty much any point as long as you pay the settlement figure to clear the finance
- You own the cars
- An obvious one, but if you like the idea of owning your fleet then buying is the best option for you.
So those are some of the advantages of buying a car as opposed to leasing.
What are the disadvantages of buying a car for business?
Now let’s look at the disadvantages of buying a car for business;
- You have to worry about depreciation
- This is the biggest disadvantage and one that you will have to take into account.
- When you own the car, you have to think about depreciation and this can be an issue for some.
- You have to think about selling the cars on
- When you lease you can hand the car back or find a buyer as soon as the contract ends. If you own the vehicles then you will have to think about selling them on and this can be time consuming.
- If you are looking at Cash Purchase, then it’s a lot of money to part with at once
- This might not be an issue for some, but it will be for others
- You won’t get a new fleet every few years
- Or if you do, you have to go through the process of selling your old fleet
So those are some of the disadvantages of buying a car for business.
Business Car Leasing vs. Business Car Buying; Which is Best?
After all that, which one is better?
It really depends on what you want from your vehicles. If you want to own your vehicles, then naturally you should buy them. Likewise if you don’t want to make monthly payments then you should look at a Cash Purchase.
However, if you like the thought of refreshing your fleet every few years and potentially having a nicer fleet for less money, then leasing is perfect for you.
Ultimately, it’s down to what you think is the best for your situation.
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. Both options are suited to different people, so it depends on your individual situation as well as your company situation. Hopefully, however, this has given you some idea and helped you on your way to making an informed decision.