When looking at cars for your business, you might have come across the term Business Contract Leasing.
Business Contract Leasing is one of the fastest growing lease schemes in the UK and doesn’t show any signs of slowing down.
But, what is it?
In this article, we look at everything to do with Business Contract Leasing, which is normally referred to as Business Contract Hire, including what it is and its pros and cons.
What is Business Contract Leasing?
The general definition of Business Contract Hire is where an asset is leased to someone, in this case, a business, for a set period of time. The Lessor is the person who leases the asset, the Lessee is the person who upholds specific obligations as defined in the lease agreement.
In the context of vehicles, Business Contract Leasing is an agreement in which the leasing company, the Lessor, provides a business with a car, the asset, to a business, the Lessee.
When we talk about Business Contract Leasing, we are referring to Business Contract Hire, which is just another name for it.
What is Business Contract Hire?
Business Contract Hire is the most popular form of leasing and is usually what everyone is referring to when they talk about car leasing. It is also known as just Contract Hire or CH.
Business Contract Hire is where a business has a vehicle, or a fleet of vehicles, for a set period of time (usually 2 to 5 years), paying a monthly fee. Once this period of time is up, the business returns the vehicle or fleet of vehicles with nothing more to pay (subject to mileage and condition restrictions, which we will discuss further down the article).
You can read more about Business Contract Hire here or watch our video below.
What are the advantages of Business Contract Leasing?
There are so many advantages with this type of leasing, which is why it’s so popular. Some of the advantages include;
- The monthly payments are set for the duration of the contract
- You set the monthly payments at the start of the contract and this does not change. Therefore, this scheme makes for easy budgeting.
- You don’t have to worry about negative equity
- You don’t pay for the full amount of the vehicle, only the value it will lose in its time with your business. This means that you won’t have to worry about negative equity
- You won’t have your cash tied up in a depreciating asset
- Nor will you have to worry about depreciation because you hand the car back at the end of the term.
- Road tax is included
- This is one less thing to worry about, particularly if you have a fleet of vehicles.
- Tax benefits
- There are some great tax benefits to be had with Business Leasing
- If you are leasing through a VAT registered company, then you can claim 50% VAT back on the monthly payments. You can claim 100% VAT if you are leasing a van.
- If you use the vehicle for personal use, then you can claim the monthly cost of the lease against profits. If your vehicle emits 160g/km of CO2 then you can only claim 85% back. If it emits less than that, then you can claim 100% of the VAT back.
- The finance commitments can be “off balance sheet”
- With a Business Contract Lease, the commitment can be “off balance sheet” meaning that the liability of the finance doesn’t appear on the company accounts.
As you can see, there are some huge benefits that make it an appealing option for many businesses.
What are the disadvantages to Business Contract Leasing?
However, there are some disadvantages. These include;
- You don’t own the vehicle
- You have to get the vehicle serviced throughout
- This is an additional cost that you might want to take into account.
- You are subject to mileage and condition restrictions
- You have to stick to a pre-agreed mileage. If you don’t, then you will be subject to an excess mileage charge, which we will talk about further down the article
- You will also have to keep the car in good condition. We’re sure that you will, obviously, but this lease is not for vehicles that will suffer more than fair wear and tear.
- The condition of the vehicle must be kept in line with the BVRLA Fair Wear and Tear Guide.
How is the cost of a Business Contract Lease calculated?
There are several things that affect the cost of a Business Contract Lease. These things include;
- The length of the contract
- Your annual mileage
- Choice of supplier
- The type of car
- Including the make, model, specification and engine
- Credit rating
- Residual value
- Manufacturer’s targets
- Any additional features you might want adding to the vehicle
The cost of this scheme specifically is determined by;
- The residual value
- This is how much the vehicle is expected to be worth at the end of the contract
- Purchase price
- This is how much the vehicle is bought for
- Length of the contract
- Annual mileage
The general calculation is as follows;
(Purchase price – deposit (or first rental) + interest) – estimated residual value/number of monthly payments
However, you are going to need more than a calculator to work it out, so we recommend you talk to your vehicle broker about how it is all broken down.
And that’s how you get the cost of a Business Contract lease. You can read more about that here.
How can I get a Business Contract Lease?
There are a few different ways you can get a Contract Lease. Two of the most common ways are going through a vehicle broker or a dealership.
A vehicle broker is essentially the middleman between you, a dealership and a finance house. You go to them with your requirements and they shop around for the best deal. Then, you choose which one is best for you.
A dealership, however, is the more traditional way of getting a car, both buying and through leasing. You go into a dealership that sells the brand of your choice, you choose a car and they offer you a deal.
What are the pros and cons of going through a vehicle broker?
There are several advantages of going through a vehicle broker. These include;
- They’re independent
- Brokers aren’t usually tied to any brand or finance house. This means they only have to meet their targets and not the targets of the brand. They can also give you their honest opinion.
- They have access to multiple finance houses
- Dealerships often have access to just one finance house which means you might not be getting the best deal for you
- You have access to multiple brands
- Brokers are perfect for those who do not want to be tied to one brand or are yet to decide which brand they want to go for.
- Brokers do the hard work for you
- You simply tell them your requirements and then you can sit back and relax while they do the hard work for you.
- You can access ‘fleet’ discounts
- Brokers have access to different types of discounts that aren’t available to the public.
However, there are some disadvantages. For example;
- They may not be reputable
- This can easily be avoided but it is something you should look out for. Some vehicle suppliers may not be reputable so it’s important that you do your research before you choose a broker.
- They might not have access to as many finance houses
- This again can be avoided if you go through a reputable broker that has the experience and the contacts.
- However, some brokers do have limited funders.
The main disadvantage of going through a vehicle broker is that they may not be experienced or reputable but this can very easily be avoided. You can read our article about how to choose a vehicle broker here.
What are the pros and cons of going through a dealership?
Some of the advantages of going through a dealership include;
- You get to look at the cars
- You can go and see the cars in the showroom, as well as take them out for a test drive if you wish
- You may benefit from the dealership retail discount
- This is a discount that is exclusive to dealerships
- They also tend to slash their prices when they get new models in because they will want to clear out the old models.
- You won’t have to pay an admin fee
- Broker administration fees can be up to £500. This isn’t a problem for some but it is something to consider.
However, there are also some disadvantages;
- You are limited to one brand
- Going through a dealership can sometimes feel quite restricting as you only have one Manufacturer to choose from
- You won’t get an unbiased opinion
- The salesperson in the dealership won’t want you to go to a different dealership selling a different brand. Therefore, you cannot guarantee you are getting an honest opinion about whether you are getting the best deal.
You can read more about whether a vehicle broker or a dealership is right for you in our article here.
What is excess mileage?
As we mentioned earlier in the article, if you go over your miles then you will be subject to something called an excess mileage fee.
If you go over your miles at the end of your lease contract, then the finance house will charge you an excess mileage fee. The amount you will have to pay will depend on the lease company and sometimes the vehicle model. It can range anywhere from around 5p to £1+VAT per mile.
You can read more about excess mileage charges here.
In conclusion, Business Contract Leasing is essentially Business Contract Hire. It is the most popular form of leasing and a hugely popular way of financing a car for your business. There are many advantages of Contract Leasing including the fact that you don’t have to worry about depreciation and a number of tax benefits that come with leasing through your business. You can get this type of lease through both a vehicle broker and a dealership, both are viable options for different situations. Hopefully, this has cleared a few things up in terms of what Business Contract Leasing is and how it works.