Car finance or car lease for your business?

Roman Danaev

If you’re thinking of purchasing a car (or cars) for your business, then you’re likely to be in the fortunate position of being slightly spoilt for choice in terms of funding possibilities!

Let’s look at some of the issues and options.

What do “purchasing” and “finance” mean?

To begin with, it’s important to be clear what your own intentions are.

Although many of us use terms such as “purchasing” and “finance”  to cover all situations, more correctly, we should perhaps be saying “using” and “paying” in general terms.

This isn’t just playing with words, it’s actually important because it cuts to the chase as to how you go about getting a business vehicle, pay for it and importantly, account for it too.  

For example, do you want to own (eventually) the vehicle concerned or do you simply want a car to drive?

That matters because:

  • purchasing means the car will become your property (an asset that sits on your balance sheet) in due course and you may need to finance (i.e. borrow) to make that happen;
  • by contrast, if you’re not bothered about ownership of an asset, leasing or even renting might be an option. Your costs there can be written off as a business expense item on your company’s P&L (subject to the size and emissions of the vehicle).

Of course, there are hybrid solutions as well, such as leasing with the option to purchase at the end of the term.

The bottom line is that it’s important to be clear what you’re looking for — eventual ownership of the vehicle or just something to drive? That might play a very big part in you choosing which funding options you progress.

Leasing and hire options

If you really don’t want to eventually own the vehicle or are undecided, these business car finance options may serve a purpose.

There are many variations to choose from but here we’ll consider CH or Contract Hire.

It typically works simply:

  • you place a deposit on a vehicle;
  • you then pay the renting or leasing company, an agreed monthly amount to use the vehicle over a specified period of time;
  • at the end of the period, you return the car.

You may be able to eliminate the deposit but that will increase your monthly payments.

On the downside, after paying out substantial sums of money over time and taking the P&L hit, you end up without an asset and nothing to show for your expenditure.

Car finance options

Hire Purchase (HP) is a very familiar, simple and eternally popular method of financing a car purchase:

  • you provide a deposit (perhaps around 10%);
  • the car finance company you’ve chosen will purchase the vehicle. It remains their property initially but after you have made regular monthly payments over a period of typically some years, the vehicle will become your property. In the interim, you’re allowed to use it as the registered keeper.

A variation on this is what’s called “Contract Purchase”.

It’s sort of a hybrid between leasing and purchasing:

  • the initial deposit and monthly payments operate very much as per HP above;
  • at the end of the repayment term, the vehicle doesn’t automatically become yours but you will have an option to purchase it outright following one single final payment. That’s often referred to as the “balloon payment”;
  • if you choose to take it, the car becomes your property. If you choose not to, then it goes back to the financing company.

Which is the most suitable option for you?

For many businesses, the idea of spending large sums on a vehicle over time, only to have nothing tangible at the end of it, might seem difficult to take on-board. They might see that as wasted spend and so car finance may be the solution.

On the other hand, lease/rent options do have the attractions of avoiding long-term commitments, as some may allow you to return the vehicle at any time.

In the final analysis, companies may see these pros and cons differently, depending upon their own individual financial position. Your accountant might be able to offer further specific advice here.

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