Business leasing, also known as Business Contract Hire (BCH), lets you drive a new vehicle every few years, mainly for work purposes. It’s like personal leasing, only cheaper because VAT registered businesses can claim back on at least half the tax on a deal.
Read on to find out if you qualify for a business lease, what the process involves and how to make sure everything runs smoothly.
What is business car leasing?
Leasing a car for business is a financial agreement between a finance provider and a company for a brand-new vehicle for fixed monthly payments. There’s even the option to lease multiple models if your employer needs a fleet, like a taxi firm would, for example.
An initial payment is required at the start of the deal, which will be put towards the total cost of the lease price. This upfront amount is worked out as multiples of the monthly rental for the car, with one, three, six or nine months usually the standard option.
An agreement will usually last anywhere from 2-4 years, depending on how long the company needs the car for. An annual mileage cap and initial payment are also decided before the vehicle is delivered.
Some providers will offer shorter and longer contracts too, such as one or five-year deals, for greater flexibility.
Just like with a personal lease, the business which the vehicle is under will decide how many miles each year it will be using the car (or cars) for. This can be as little as 8,000 miles or in excess of 30,000 miles but will depend on the provider and type of vehicle chosen.
How to lease a business car
The process for getting a lease car or fleet for business use is no different than if you were to lease a car for yourself.
It can be broken down into these three simple steps.
1. Choose a vehicle
Depending on the needs of the business, the decision will need to be made what manufacturer and model of vehicle will be leased.
Commercial vans are becoming an increasingly popular option for companies that specialise in transporting goods or that need to carry lots of passengers. The fixed monthly payments make for predictable costs on the cashflow, while being able to claim up to 100% tax relief on the lease payments means vehicle spend is affordable.
Should you wish to include a maintenance package for repairs on wear and tear issues, general servicing and MOT costs (applicable if your contract is at least 36 months long) then all the VAT can be reclaimed on this element too.
When it comes to cars, the VAT return on the monthly payments tends to be 50% but be sure to check this with the finance provider before agreeing.
If the business car is going to be used for private trips by employees, choosing a vehicle with low CO2 emissions will see that there’s lower BIK (benefit-in-kind) tax payments to provide the employer with.
Even if you haven’t got a clue, you can begin your search by using your monthly budget.
2. Configure your deal
After you’ve found a suitable vehicle, you can then decide how much you want to pay upfront, the length of your contract and how many miles you’ll drive the car for.
At this point, it’s important to look at the business’s budget to know what can be afforded, especially when choosing an initial payment amount. We would recommend calculating the total cost of an entire agreement before signing any contract, inclusive of the upfront payment, monthly rentals and insurance.
Be honest with your annual mileage allowance to avoid extra charges at the end of your deal. We advise factoring in an extra 5% of what you think is an accurate figure, this way you’re covered if the vehicle is needed in an emergency.
At this point, you’ll also be able to decide whether you want a maintenance package for the vehicle. If selected, the additional cost will be displayed in your agreement summary, and you can decide whether you want to pay this as part of the monthly rentals or separately.
Given that 100% of VAT charges can be reclaimed on business maintenance packages, it’s worth considering if you’re opting for a high-mileage lease and want to keep on top of repairs and servicing for the car. The same goes for if your agreement is three years or longer, at which point this additional cover will take care of the cost of an MOT.
3. Arrange insurance and delivery
Most providers will include free UK mainland delivery of lease vehicles and you will be asked to choose an appropriate day for the handover to take place.
At this point, it’s important to check that the director or authorised member of staff is there to sign for it, otherwise there’s a chance that it will be deemed as a failed delivery. This will lead to an additional charge for having to re-arrange another delivery slot.
Unless your business lease agreement is specified as a ‘complete care’ or ‘total care’ package, you will need to arrange a comprehensive insurance policy is in place for the vehicle.
Because the finance provider is the registered keeper and owner of the vehicle, it’s important to mention this to avoid invalidating the policy in the event of a claim and to prevent being accused of insurance fraud.
Make sure that the start date of your insurance policy is the same as the delivery day for the lease car so that you can drive it straight away. If you’re not sure what day the vehicle is due to be dropped off, contact the leasing company to find out this information.
Do I qualify for a business lease?
There are certain criteria each business will need to meet before being approved for a BCH agreement. It’s slightly different to a personal deal because the company is the main contract holder, whereas in a PCH deal it would be a private individual.
As a result, certain details and documents are needed to finalise any deal, which you can find below.
As with any form of contract hire or leasing product, a BCH deal is subject to the approval of the finance company providing the funding for the deal. For this reason, the business looking to lease will need to pass a quick credit check. This is necessary for them to be sure that you will make the monthly payments on time.
For this to be successful, the credit score of the company will need to be considered ‘good’. There isn’t a definitive number which will reflect this, with minimum credit score requirements being different for each business.
If you’re the company director and have poor personal credit but your businesses has strong credit, you may still be able to get approval for business leasing, depending on the finance provider.
When undergoing a credit check, there will most likely be an automated process which does this. However, there may be a point where the finance provider needs extra information.
As standard, each company will need to provide the last three months’ worth of bank statements and/or audited accounts, along with proof of ID and address of the company’s main director. As well as showing a positive cashflow, the credit history shouldn’t show any CCJs (County Court Judgements).
What business can lease?
Because leasing on behalf of a business requires some form of financial history, new enterprises that are less than three months old will struggle to be approved. This is due to there being little or no evidence to prove that the rental payments will be made on time. Regardless of whether the available funds can afford it, what matters is that the finance provider can see there’s a plan in place to factor in the total cost of the lease deal, on top of other expenses.
It’s worth noting that it’s not just the age of a company which will determine whether it’s successful in applying for a fleet or individual vehicle for a business offer. Finance providers will expect the business to be one of the following:
- Sole trader
- In a partnership
- Limited Liability Partnership (LLP)
- Public Limited Company (PLC)
- A local authority (health services, social services, education etc.)
- A limited company
- VAT registered business
- A charity
- An embassy
Can a new business lease a car?
If you’re part of a new business then you can still lease a car for business use, as long as you have proof that the company can afford the monthly payments. You’ll also need to provide evidence that the business has enough history of trading; usually finance providers require at least two years' worth of trading.
However, there may be some instances where you can still get a business lease for your new company, even if you’ve been trading for less than two years. Your options will be limited and you will need to provide additional supporting documents, such as business bank statements, management accounts and a director’s guarantee (this is a promise by a company’s director that states that they will pay the monthly rentals if the company can no longer afford them).