Is Vehicle Leasing the Right Option for Your SME?

To buy or to lease? Many SMEs struggle to weigh the pros and cons of leasing a fleet of vehicles versus purchasing outright. Tom Preston talks us through the key points to consider.

By Tom Preston

According to the BVRLA (the trade body for the vehicle rental and leasing sector), vehicle leasing is booming in the UK with nearly 300,000 cars and vans leased to UK companies by the end of 2017.

Leasing involves a vehicle agreement between a finance company and an established business. Like with a personal leasing agreement, you choose your vehicle or vehicles, pay an agreed deposit upfront, set your monthly payment amount and drive away.

However, without carrying out some prior research to get an understanding of different contract types, it can be difficult to decide which leasing deal is right for your business, if at all. Here are the key aspects you need to consider:

Balancing the books

Keeping out of the red is the number one priority for any business, particularly for those just starting out or growing quickly. Business owners can find the cost of purchasing a vehicle or fleet upfront a barrier. So, if you’re struggling with poor cash flow or want to free up money to spend elsewhere in the business, vehicle leasing could help balance the books.

Unlike purchasing, leased cars or vans don’t count as a company asset, meaning you can claim your monthly lease payments as a business expense. If the vehicle is used entirely for business purposes you’ll also get back 100 percent of the VAT or 50 percent if you also need it for personal use.

For new vehicle leasing agreements, you should be covered by the original manufacturer warranty for the duration of your lease period, so you won’t have to pay out for any damage caused by a manufacturing defect.

Research different contract types

Vehicle leasing options can seem complex at a first glance. That’s why it’s important to understand the different types of contracts and the benefits of each to your business before you jump into a deal.

The four main types of business leasing and finance options are explained below:

1. Business Contract Hire (BCH)

Business contract hire involves a business paying set monthly payments over an agreed period of time in return for the use of an individual car or a fleet.

The contract hire company will work out how much the car will be worth at the end of the agreement (guaranteed minimum future value), taking depreciation into account. Monthly payments are determined by the difference between the future value and initial value of the car being split over your lease length.

When the contract ends, the individual car or fleet is simply returned. There will be no further charges, given the vehicle is returned within the agreed mileage and wear and tear guidelines.

The benefits of BCH are fixed monthly costs for budgeting, no depreciation losses, and vehicles can be updated or downgraded at the end of the contract according to business needs.

2. Business Contract Purchase (BCP)

Business contract purchase agreements also cover the depreciation of the vehicle over the lease length. However, at the end of a BCP agreement you also have the option to return the car, keep the car or part exchange it for a new vehicle or fleet.

3. Hire Purchase (HP)

Hire purchase involves paying off the value of a car or fleet in monthly instalments. Any deposit amount and monthly instalments go towards paying off the entire cost of the car.

You do not own the car until the lease ends. At the end of the hire purchase agreement, you are the registered owner of the vehicle.

The benefits of HP are that there are no additional charges for excess mileage or damage to the vehicle, you can plan your outgoings in advance, and the final payment is smaller than on a BCP agreement.

4. Lease Purchase (LP)

There are three payment obligations to a lease purchase; a deposit, monthly payments and a final balloon payment to end the contract. Once the balloon payment is made you can either keep the car or part exchange the vehicle for a new lease car.

LP agreements typically have lower monthly payments than hire purchase deals and you can settle your finance early by paying off outstanding payments if you need to.

Deciding on a leasing period

When speaking to a leasing broker, a representative will get to know your business and its needs before recommending the best type of contract. Business leasing agreements are very flexible in order to keep up with the changing needs of your company, your staff and your customers. Car leasing brokers try to accommodate this by offering different length contracts, usually starting at 24 months and going up to 60 months.

If keeping up your business’ public appearance is important, a shorter contract can give you the ability to switch to the latest model or upgrade features in line with your budget. If you prefer the certainty of a longer lease, your initial deposit and monthly repayments will be smaller.

Improve your credit rating

Vehicle leasing is available to all types of businesses and at different stages of growth, even those with less-than-perfect credit.

There are credit leasing contracts available to those with a wide range of credit and financial backgrounds, often running for 48-60 months which is slightly longer than most standard leases. Overtime, a leasing contract could even help increase your business’ overall credit score and give stability to your accounts.

About the Author

Tom Preston is the Managing Director of Hippo Leasing, one of the UK’s leading suppliers of new and used leased vehicles and a broker member of the BVRLA. Out of work Tom can be found rallying in his Skoda Fabia R5 on various tarmac and forest events nationwide.