Are you a business owner looking to get your first car for the business? If so, you will have discovered there are different routes to consider, such as purchasing the cars outright, car finance or car leasing. You will then have found multiple options for both car finance and car leasing. So, how do you know which route is the best one for you and the business?
For small businesses, the best option is car leasing because of both the affordability and flexibility on offer. With a car leasing agreement, whether that be Business Contract Hire or Business Contract Purchase, you are not tied down to the car and can hand the car back. The monthly payments are also lower than on a car finance agreement for comparable vehicles.
Why is business car leasing more affordable?
Car finance agreements cover the total value of the car under their agreements. Car leasing does not. Instead, car leasing agreements cover the cost of the depreciation over the leasing period. All cars depreciate from the moment they are driven off the forecourt. Some lose 20 per cent immediately, whilst others lose 40-50 per cent over the first three years, car leasing agreements spread the value of that depreciation across the monthly payments.
The level of depreciation depends entirely on the type of car you have chosen, how long you wish to lease it for and how many miles you want to drive over the course of the lease deal. Most lease agreements last between 24-48 months, with some, available for 60 months under certain circumstances. This means that the cost of the lease can be stretched out further, but it also means the car will depreciate more.
You will also be asked to decide on your annual mileage allowance, which is the decision of how many miles you will drive per year. The average Briton drives 9,000 miles a year, but if you are using this more for business it could be higher. 5,000 miles per year is the usual start point. The more miles you drive, the more the car’s value will depreciate, therefore putting the price of your agreement up. However, if you choose a lower annual mileage allowance and go over your miles, you will face an excess mileage fee.
The value of depreciation is always much lower than the value of the car. This means that a car lease agreement is lower than a finance agreement by design. This also makes car leasing a more affordable option for small businesses looking to get their first car.
Business contract hire
Contract Hire is the purest form of leasing. You lease a car for a given number of months and at the end, you hand the car back. This means you are never tied down to the car and depreciation isn’t your concern. This means that Contract Hire offers the lowest payments of all leasing and finance agreements on offer, but you are solely paying for the depreciation with no intent of buying the car.
This type of agreement works by you choosing whether to pay a deposit, followed by a series of monthly payments for the duration of the agreement. The monthly payments are decided by a variety of factors including length of the agreement, number of miles you intend to drive, the amount you choose to put down as a deposit and your credit score.
Business contract purchase
Business Contract Purchase stands between car leasing and car finance by offering you the most flexibility for your business. Unlike with Business Contract Hire, you get a choice with Business Contract Purchase of whether to hand the car back or to pay a balloon payment, attaining ownership of the car.
A BCP deal behaves the same way as a Contract Hire agreement for the most part. You choose whether your business wants to place a deposit, followed by set monthly payments. This again covers the value of the depreciation of the car rather than the value of the car. However, that balloon payment is where the difference lies.
The balloon payment is the Guaranteed Minimum Future Value, which is calculated when you start the lease. It is the estimated value of the car based on the length of the lease and your mileage allowance that determined how much your car will be worth when the lease comes to an end. If you choose to pay off that GMFV, you take ownership of the car.
Alternatively, you can choose to hand the car back and remain on the car leasing side and move on.
No deposit car leasing
You do not have to pay a deposit to lease a car. The choice is entirely up to you and what you can choose to afford.
There are four standard options available when it comes to paying a deposit on a car lease.
A deposit worth three monthly payments
A deposit worth six monthly payments
A deposit worth nine monthly payments
A deposit simply allows you to pay off a chunk of your lease at the very start. However, some businesses, especially small ones, don’t always have the funds for a deposit. That means that you can opt to not pay one. The only difference being the value of the deposit will be fairly spread out across your monthly payments, making them slightly higher than they would have been if you had paid a deposit.
If, as a business, you are looking at acquiring a car, business car leasing is a sensible and affordable avenue to explore. Hippo Leasing has a great selection of cars available for you to browse and a dedicated team to find you the best lease deal for your business.