Business Contract Hire
As the most cost-effective and easily manageable form of car leasing, business contract hire is one of the most widespread. In fact, it is the most popular way of hiring a business vehicle, with over half of all new company cars funded in this way.
What is business contract hire?
Also commonly referred to as ‘car leasing’, business contract hire is popular with various types of fleets and works in much the same way as personal contract hire, albeit exclusively for companies.
Business contract hire agreements allow a company to take on cars for a set period of time (usually between 12 months and four years) and pays via fixed monthly instalments. The company taking out the agreement doesn’t own the vehicles, however, so when the term of the contract is over, the cars are returned to the lease company.
How do you pay?
It’s important to understand how your payments are determined.
The contract hire company will work out the ‘residual value’ of the vehicle – that is its value at the end of the contractual period once depreciation is taken into account. To estimate this value, the company will ask you to stick to a strict mileage limit while you drive the car, and exceeding this limit could see you penalised at the end of the term.
To determine your payments, the company will deduct the estimated residual value from the retail price of the car, leaving you pay the difference in monthly instalments.
What are the pros and cons of contract hire?
There are many different pros and cons of contract hire, and what may suit one business won’t necessarily suit all, but the chief advantages include:
Low initial payment - Unlike other forms of finance, typically business contract hire requires three monthly payments upfront.
Fixed monthly costs - For a set monthly payment, your business gets the use of a vehicle for an agreed duration and mileage that suits your needs. How much you pay each month will be determined by a number of factors, including the type of vehicle, the purchase price of the vehicle, mileage, and the estimated value of the car at the end of the contract (known as Residual Value). Therefore, the higher the residual value of the vehicle, the lower the business contract hire monthly payments.
Hassle free - For an additional monthly fee, you can ask your business contract hire company to take care of nearly every hassle associated with vehicle ownership, whether it is maintenance, servicing or replacement vehicles.
Free up capital - Business contract hire is an efficient way of running a fleet of vehicles. Rather than tying capital up in depreciating vehicles the company is able to invest in other areas of the business. Vehicle leases do not have to be shown on a balance sheet, which will improve a company's liquidity ratio, gearing and return on assets.
Flexibility - Running a fleet using business contract hire gives the company flexibility to respond to changing market conditions. Business contract hire agreements are typically between 12 and 48 months long, which allows the fleet to respond to changes to staffing requirements more efficiently than through alternative funding methods. This flexibility can also help business’ respond to changes in their Corporate Social Responsibility (CSR) guidelines, for example switching fleet vehicles to greener, more fuel efficient models.
Tax advantages - Some or all of the rental charge can be offset against taxable profits.
Leasing company power - The major leasing companies purchase thousands of vehicles each year; therefore they are experts in negotiating substantial discounts with vehicle manufacturers. They can pass these savings on to you in the form of a competitive business contract hire rate.
Latest technology – Because your fleet will always comprise modern vehicles, your company could benefit from the latest fuel-saving developments in in-car technology.
You will have to be wary of a few things though:
Beware of excess mileage - Have an accurate idea of the vehicle’s annual mileage requirement, under estimate and you will face additional charges if the agreed mileage limit is exceeded. Over estimate and you be paying a higher monthly fee than you actually need.
No option to buy - Unlike some forms of business car leasing, there is no option to buy at the end of the contract.
Damage - Standard wear and tear is allowed, however anything more severe could see you presented with a bill. Make yourself aware of what is considered fair wear and tear.
Is business contract hire right for my company?
Depending on what your business needs from its fleet, business contract hire could be an ideal method of financing vehicles.
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