A guide to business leasing

This handy guide provides an overview of what business leasing means, the factors involved in determining how much it costs, what the benefits are and how the application process works.

What is business car leasing?

Business leasing is another name for business contract hire. Essentially, it’s a car lease agreement between a finance company and a business that’s ideal for those who use their car for work as well as for personal use. The process is similar to personal leasing in that you choose a car (or more than one car if leasing for a business fleet), agree on a monthly payment to be paid over a set period (normally between 2 and 4 years) and then the finance company secures the car. Your car will be delivered to you on an agreed date. When you come to the end of the leasing contract, you hand the car back to the leasing company.

How much does business leasing cost?

The monthly cost of a business lease varies depending on a range of factors, including:

  • The type of car or van you want. It’s important to note that premium vehicles can come at a higher cost.
  • The amount of annual mileage you’re going to do. As part of your business lease, you’ll agree an annual mileage amount. The higher your annual mileage then the higher the monthly leasing payments, as higher mileage means the car depreciates more quickly.
  • The company you use for the lease. There’s a range of finance companies, car dealerships and leasing brokers who can offer competing rates, so it pays to shop around to see where you can get the best deal.
  • The size of your initial payment. The initial payment, also known as initial rental, is an upfront payment you must make at the start of the leasing contract. This can either be the cost of 1, 3, 6, 9 or 12-months’ worth of your monthly business leasing fee depending on the deal you choose. If you choose a low initial rental (say month’s initial payment) your monthly payments will be higher than if you choose to pay 6, 9 or even 12 months initial rental.
  • The contract length. Typically, if you take out a longer contract, such as four years instead of two, then your monthly payments will be lower. Here at AMT, we can offer some 12-month as well as 18-month contracts in addition to the usual 2, 3- and 4-year contracts you see across the market. If a shorter contract is of interest to you then just let us know.
  • Whether you include a maintenance package. A maintenance package is an optional extra cost that covers your vehicle for servicing, repairs, replacement tyres and so on. Read more about what’s included in a maintenance agreement in our handy maintenance guide.

Once you’ve chosen your vehicle you’ll be able to amend the contract type, contract length, annual mileage and the initial rental to select the contract terms that work best for you.

What's the jargon mean?

Business lease deals are normally calculated over a 2, 3 or 4-year period. A 2-year deal that’s advertised as “3+23” means that the initial payment required is 3 month’s lease costs upfront (3 payments in advance), then a monthly payment for the remaining 23 months.

What are the benefits of business leasing?

  • Tax benefits: If your lease car emits equal to or less than 110g/km of C02, you can claim back 100% of the monthly rentals against tax. Even if your emissions exceed this amount, you can claim back 85% of your monthly rentals.
  • VAT recovery: You can claim back 50% of your VAT on your monthly leasing payments for cars, 100% for vans and 100% of VAT for any maintenance fees.
  • It frees up cash: If you lease a car instead of buying, you won’t have your cash tied up in a depreciating asset.
  • Minimise any depreciation risk: When you lease a car, the monthly payment is essentially to cover the depreciation cost of the vehicle. When you buy a car, you take the risk of depreciation on yourself, so you will likely find that when you come to sell the car after a period of time, the value of the car is much less than what you paid for it.
  • No large capital outlay is required upfront: The cost of purchasing vehicles outright can be very expensive in comparison to leasing.
  • Business certainty: Your motoring costs are fixed, which makes your business more financially stable. This makes financial planning and budgeting easier.

What are the potential drawbacks to business leasing that you need to be aware of?

  • You’re tied into a contract for an agreed period of time. If you wanted to end the contract early, depending on the amount of time left on it and the mileage you’ve done, this could be expensive as you will incur fees.
  • You won’t ever own the vehicle and there’s no option to buy it at the end of the contract.
  • As part of any leasing agreement, whether business or personal, the vehicle needs to be well looked after and returned to the leasing company in a good condition for the vehicle’s age. If there’s any damage to the vehicle which is above the BVRLA’s “Fair wear and tear” policy, you will be charged for repairs. We’ve produced a handy guide on “Fair wear and tear”, detailing what is and what isn’t acceptable damage.
  • Your business leasing agreement includes an annual mileage allowance. This is so the leasing company can work out the correct monthly payments. The higher the annual mileage the higher the charge, as the more your car depreciates in value. If you exceed the annual allowance you will be charged a fixed pence-per-mile penalty for the amount you’re over.
  • All leases have to be recorded on the balance sheet as liabilities at the present value of the  future lease payments .  This does not apply to leases with a maximum of 12 months or less and leases of low value asset (within the region of £3000 or less).  This means  that you will have to recognise on the balance sheet, the depreciation of the leased asset as well as interest on the lease liabilities.  

Why is business leasing cheaper than personal leasing?

  • Repayments can be claimed as a company expense. If the cars you lease emit equal to or less than 110g/km of CO2, you can claim back 100% of the rental payments against tax. However, even if the CO2 emissions exceed this, you can also claim back rentals against tax, but only at 85%. The government is encouraging the use of vehicles that create less pollution and this incentive is one way to achieve that goal.
  • You don’t pay VAT. You’ll notice that the monthly payment for business leasing is cheaper than the personal leasing price. This is because business leasing prices exclude VAT. All commercial vehicles that are exclusively used for business operations can have 100% of their VAT on the finance and servicing reclaimed.

It’s worth noting, however, that if your vehicle will be used for personal as well as business use, you can’t have the VAT tax benefit on any mileage done for personal use. The private portion of the total usage must be calculated and subtracted from the total. You’ll need to keep a record to show the proportion of the annual mileage which was for business use and what was for personal use. You’ll then be taxed for your personal usage. This tax is known as benefit in kind tax or company car tax.

Am I eligible for business contract hire?

There are certain criteria which need to be met in order to qualify for a business car lease contract. These are:

  • You must be a sole trader, partnership, Ltd or PLC
  • You must be able to provide company bank statements and/or audited accounts
  • You need to produce proof of address and proof of ID for the main company director
  • Your business should have a good credit rating.

Your business will undergo a thorough automated credit check before a decision is made as to whether you qualify for business leasing. The purpose of the credit check is for the finance company to determine whether your business can afford the monthly repayments.

If you have a good business credit score, then there shouldn’t be any issue in arranging the leasing finance agreement. If you’re credit score isn’t as good, then you may be asked to provide additional evidence to prove that you can and will make the monthly payments. This could include taking out a director guarantee where you will make the monthly payments should the company fail to do so.

Business leasing for newly established companies

If you’re a business that’s less than 2 years old, you won’t have much in the way of a credit rating, either good or bad. This will make it very difficult to get finance from a finance company as they won’t have any history to go on. And this is where AMT can help. Businesses that can prove that although they’re young they’re in a good place financially could be offered a finance agreement directly with AMT. In this instance, you won’t need to use a finance company for your lease, as instead your finance agreement is with AMT.

How long does the credit check take?

Once you have completed the business finance application form, an account manager will be in touch by phone to confirm your order and run through the necessary pre-credit checks before submitting your application to a chosen funder.

Most funders respond to a credit application within 2 working days, however during busy periods (particularly March and September when new vehicles are registered), it can take up to 5 working days to receive a response from the funder.

What are the different ways I can finance a business lease?

There are 4 main ways to finance your business lease. They include business contract hire, business contract purchase, business hire purchase and business lease purchase. Here at AMT, the vast majority of our business car financing is done via a business contract hire agreement. See our guide to different business funding options for more information.

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Contact us or call us on:

0113 387 4241