If you are a business, you might be considering leasing several vehicles. This is otherwise known as fleet leasing, and is a hugely popular option for many businesses.
The concept of leasing has become more common, and is one of the most popular ways of getting a vehicle or a fleet of vehicles for your business.
So what leasing options are there?
In this article, we look at the leasing options for fleet management, how fleet leasing works and some of the advantages of fleet leasing.
If you are looking at leasing options for businesses, then you have two options;
- Contract Hire
- Finance Lease
It is these two options that we are going to talk about in this article.
What is Contract Hire?
A Contract Hire is a very common form of leasing. It is also known as Business Contract Hire or Contract Leasing. It is also referred to as CH or BCH.
Should you choose to get a Contract Hire, here is how it works;
You will have your vehicles, for anything from 1-5 years. During this time you pay a monthly fee that is fixed at the beginning of the contract. You will also agree to a set mileage and to keep the vehicles in a good condition. If you go over this mileage or your vehicle is returned in a condition that is deemed outside of the BVRLA Fair Wear and Tear Guidelines then you will face charges.
When the contract has come to an end, you will hand the vehicles, back with no more to pay.
Unless, of course, you face mileage and condition charges. The key aspect of a Contract Hire is that you do not own the vehicles. You go into the contract with the intention of handing the fleet back at the end.
For more information on a Contract Hire, you can watch our video below.
What are the pros and cons of a Contract Hire?
Some of the advantages of a Contract Hire include;
- You don’t own the vehicles
- This means you do not have to worry about depreciation or having to sell the fleet on at the end of the contract
- You get a new fleet every few years
- The average duration of a Contract Hire lease is around 3 years. This means that every 3 years your employees will get a brand new car to drive around in. This does wonders for morale and enables you to retain the best employees.
- Not only this, but new vehicles are safer, more economical and more reliable.
- If you have your fleet for 3 years then you also will never have a fleet that are outside of warranty. This means you won’t have to fork out for repairs when the fleet falls out of warranty.
- The liability of the finance can be “off balance sheet”
- If you buy a fleet of cars, then this can cost tens of thousands of pounds. This will show up on your balance sheet and could negatively influence your chances of getting a credit line in the future.
- However, this is not the case on a Contract Hire and the liability of the finance is “off balance sheet” so it doesn’t impact your chances of getting a credit line in the future.
- There are tax benefits to a Contract Hire
- These include claiming a percentage of the VAT back on your monthly payments and your initial rental and offsetting a percentage of the monthly rentals against your tax bill.
However, there are some disadvantages. These include;
- You don’t own the fleet
- This is an advantage or a disadvantage depending on who you speak to.
- If you do refresh your fleet every few years then it does mean having to then pay out for more initial payments. While the initial payments can be as much or as little as you like, it still can take a chunk out of your monthly budget and is something that you have to consider.
- This is often why people choose to have longer contracts than shorter when it comes to fleet leasing. However, the choice is yours.
- You do have mileage and condition restrictions
- This means your employees have to stay within a certain mileage and keep their vehicle in a good condition. If they do not, then you can face extra charges at the end of the contract.
- Therefore, Contract Hire is not ideal if your fleet are going to be doing a high mileage or are going to be suffering from more than Fair Wear and Tear Guide.
So that is essentially what Contract Hire is.
What is Finance Lease?
Your other option is a Finance Lease. Often popular if you want to lease a van, or a fleet of vans, Finance Lease has no mileage or condition restrictions.
When you enter into a Finance Lease Agreement you will agree to an initial payment and something called a balloon payment. This is a larger payment that is paid when the contract comes to an end. It is after the initial payment and the balloon payment is calculated that your monthly payments are calculated.
The monthly payments are fixed for a period of time of your choosing. When the contract is up, you have two options.
You can either find a third party to buy the fleet to pay off your balloon payments, or keep the fleet for another year.
If you choose to sell the vehicles, you will use the money to pay the balloon payments. If you sell the fleet for less than the balloon payments then you will have to make up the difference. However, if you sell the fleet for more, then you will be able to keep the equity.
If you choose to keep the fleet for another year then you will pay something called a peppercorn rental. This is usually the cost of one monthly payment. This enables you to keep your fleet for another year. You can do this for as long as the finance allows, but be aware that you will still have to pay the balloon payment. And the longer you keep a vehicle the higher the mileage and the more it depreciates and the less the vehicle is worth. It can be tempting to go for a high balloon payment in order to keep your monthly rentals low, but you need to keep in mind that you will have to sell the vehicles on and therefore have to be realistic as to how much the fleet will go for.
You can watch our video on Finance Lease below for more information.
What are the pros and cons of Finance Lease?
Some of the advantages of a Finance Lease include;
- There are no mileage or condition restrictions
- This makes it appealing for those who need to lease a fleet of vans or will need conversion units in their vehicles.
- There is a huge amount of flexibility in terms of payments
- You can choose how much you put down initially and how much the balloon payment at the end is. You can essentially tailor the contract to suit your needs. If you want higher monthly payments in favour of a smaller balloon payment then you can. If you want lower monthly payments then you can look at putting down more initially or having a larger balloon payment, the choice is yours.
- If you sell the fleet for more than the balloon payment then you can keep the equity
However, there are some disadvantages;
- If you want to end the contract early, then it can be costly
- You will have to pay the remaining payments and the balloon payment which can take a chunk out of your monthly budget
- You won’t own the fleet
- However, if you find a third party buyer and then you buy the fleet back off them once you have made the balloon payments and the contract has ended, then that’s none of our business.
So those are the options that are available to you for fleet management.
Fleet leasing vs. Fleet buying
You might be debating whether fleet leasing or fleet buying is better for you and your company. They both have their advantages and disadvantages, and are right for different people.
If you choose to buy, then you can often find some great deals on fleet purchases. Recently, dealerships have been doing deals on fleets starting at just 3-4 vehicles, whereas before you could only get incentives on fleets of 10+ vehicles. So, if you do buy a fleet then you still can get some great deals.
You also won’t have to worry about mileage or condition restrictions, and they can be an asset within the business. This can strengthen your accounts.
However, you will not have the advantage of handing the fleet back, you will have to think about disposing of them. Also, although you won’t have to worry about mileage or keeping the fleet in a good condition, you will have to think about depreciation if you choose to sell your fleet on.
When you lease, the upfront costs are often cheaper, as are the overall costs. If you get a Contract Hire, you are not paying for the whole vehicle, therefore it is cheaper than if you were to buy. You will also have access to a huge amount of fleet discounts that are only available to leasing customers.
Ultimately, though, it’s up to you which you prefer.
In conclusion, you have two leasing options for fleet management. Those are Contract Hire and Finance Lease. Both are very viable options but they are suited to different businesses and employees. However, both are flexible and come with a huge amount of benefits. Hopefully this has given you some idea of which option would be best for you. We work with businesses who want to lease a fleet every day, so if you have any questions then please do not hesitate to contact us.