Business leasing for dummies
Business leasing has been around since the 1990s, and has since grown hugely in popularity. In fact, it is one of the most popular ways of getting a new car for your business, with Contract Hire being one of the most popular finance agreements out there.
But, how does it all work? What leasing options are there for your business? And, how do you go about getting a business lease?
In this article, we look at everything you need to know about business leasing including what it is, how it works, and whether it is right for you.In the first part of the article, we’re going to be talking about what leasing for your business is, and how the cost of the lease is determined.
What is business leasing?
Business leasing is one of the most viable ways of getting a company car. There are a few lease options available to you and those include;
- Business Contract Hire
- Business Contract Purchase
- Finance Lease
Business Contract Hire is the most common form of leasing, and is what people tend to refer to when they are talking about leasing. Business Contract Hire involves having a company car for a set period of time, while paying a monthly fee. You have a pre-agreed mileage and are contractually obliged to keep the vehicle in a good condition. Once that time is up, you hand the car back with nothing more to pay, subject to mileage and condition restrictions. You can read more about Contract Hire here, or watch the video below. https://www.youtube.com/watch?v=sZTKPhA-th8&t=4s Business Contract Purchase works in the same way as Contract Hire until the end of the contract, where you have three options;
- Hand the car back with nothing more to pay
- Subject to mileage and condition restrictions
- Part-exchange the car
- Buy the vehicle for a pre-agreed value
- This is called the Minimum Guaranteed Future Value and is set at the beginning of the contract.
You can read more about Contract Purchase here or watch the video below. https://www.youtube.com/watch?v=ZPqgMrcEKIU Finance Lease is slightly different. It has no mileage or condition restrictions, and is often better suited to vans or vehicles that are going to be doing a high mileage. With a Finance Lease, you make monthly payments for a set period of time. You have a final balloon payment at the end of the contract, this is a slightly larger payment that is pre-agreed at the start of the contract. When the contract is up, you will have to find someone to buy the vehicle. If you sell the vehicle for more than the balloon payment then you get to keep the equity. However, if you sell it for less, then you will have to make up the difference.
Alternatively, you can pay something called a peppercorn rental. This is usually one small monthly payment, and allows you to keep your vehicle for another year. You can read more about Finance Lease here or you can watch the video below. https://www.youtube.com/watch?v=y_cxGQzPLZw
How is the cost of a business lease determined?
When you lease a vehicle, you do not pay for the entire vehicle. This is unlike a purchase scheme, where you essentially stagger the cost of the whole vehicle.
The cost of a Contract Hire is determined by how much the vehicle will depreciate during the agreement. Essentially, it’s the difference between the purchase price and the residual value of the vehicle. The smaller the difference between the two prices, the lower the monthly payments. This is why brands such as BMW and Mercedes are so popular to lease, because they depreciate slower than other brands. Other vehicles that also do well in terms of leasing are the ones that vehicle brokers can negotiate the most amount of discount on.
If you can get your vehicle broker to lower the purchase price as much as possible, then this lowers the difference between the purchase price and the residual value which then lowers the monthly payments.
The cost of Contract Purchase is calculated slightly differently because you have to take into account the Minimum Guaranteed Future Value. This is how much the car is expected to be worth at the end of the contract and depends on a variety of factors.
Once you have factored in the MGFV, you deduct this from the cost of the car. You then add the expected depreciation. This total is divided by the number of months the contract is for and will give you how much you will pay monthly.
The cost of a Finance Lease is pretty simple; once you deduct the balloon payment from the overall cost, you then divide it by how many months the contract is for. That will give you how much you pay monthly. One thing we recommend people avoid is going for a high balloon payment in favour of low monthly payments. Sometimes these huge balloon payments can be unrealistic and will mean you have to pay out considerably more.
How to get a business lease
The two main ways of getting a lease through your business will be either through a dealership or a vehicle broker. Both have their merits, and it’s really up to you which you prefer.
Going through a dealership is the more traditional way of getting a new vehicle. You are limited to one brand however, and dealerships often don’t have access to as many finance houses which means you might not always get the best deal for you. However, dealerships may be able to access deals for fleets and businesses that might not be available to you.Alternatively, you could go through a vehicle broker. Experienced and trustworthy vehicle brokers are often independent and therefore can give you an unbiased opinion. They also have access to multiple finance houses which means that they can often find the best deal for your business.
Vehicle brokers are great if you are not sure, or not too bothered, by which brand you go for, as they can find the best deal from a variety of makes and models.
How to qualify for a business lease
When you get a business lease, you will have to go through a credit check. This is because the finance house need to know that you are going to make the monthly payments, and they will do this by looking at your credit history.
Because you are a business, you will have to go through a bit more than if you were a private individual because your business will have to go through a credit check as well. When you apply for finance with a business lease, you should be prepared to provide the following to the finance house;
- A full UK driving licence
- Proof of UK residency
- 3 years of address history
- A Director that can act as a guarantor
- No current CCJ’s
- Proof of positive trading (for at least three months)
- Opening balance sheet if available
If your business has a very strong credit score, then you may not have to show this to the finance house, as your credit score should be enough for the finance house to know that you should be able to make the monthly payments. However, you should be prepared to show the above to the finance house to make the process as smooth as possible and to increase your chances of getting approved for finance.
Getting a business lease with bad credit
If your company has bad credit, then you could still qualify for a lease. You will have a higher chance of getting approved if you have a Director that is willing to be a guarantor. This is where the Director or Directors give a guarantee that they will take on the monthly payments should the business be unable to make them. This is called a Director’s Guarantee and the Director/Director’s themselves will have to undergo a credit check.
If you personally have bad credit but your business has strong credit, then there may be options available to you as there are some finance houses that will only credit check the Company and not the Director’s. Be mindful though, this is not the case with all finance houses.
Who can drive my company car?
If you have a company car, then you might be wondering who can drive it. Anyone can drive the vehicle as long as they have comprehensive insurance and are insured to drive that vehicle. It must be fully comprehensive insurance when you have a lease car because you do not own the car, therefore the finance house sees you as a higher risk.
What is a pool car?
When doing research on business leasing, you may have come across the term ‘pool car’. This is where the company vehicle is used by multiple employees. The pool car is left on site overnight and at weekends, and is driven by multiple employees for business purposes only.
This includes travelling to meet clients, going to meetings and travelling to training days.
If the vehicle is a pool car, then you will not have to pay company car tax. You only have to pay company car tax on a vehicle if it is used for personal use. This includes travelling to and from work.
How does company car tax work?
As we briefly mentioned above, you do not have to pay company car tax if your car is a pool car.
You will have to pay company car tax if you are using your company car for personal use, including travelling to and from work and if you are the only employee driving the vehicle.
How company car tax is calculated depends on your personal tax bracket, the P11d value of the car and the amount of CO2 the vehicle emits. A general rule is the higher the CO2 amount, the more you will have to pay in company car tax.