Car leasing is an increasingly popular method of funding for individuals and companies. Approximately, one in four vehicles in the US is leased and the UK appears to be heading in this direction. Business car leasing has a number of advantages for companies, as opposed to other ways of funding. Business contract hire and Business hire purchase are two common schemes through which companies can fund a company car or fleet.
Business contract hire
This method is quite straight-forward and can be very cost-effective. About half of all the company vehicles are funded in this way. An initial, small payment is made. This figure is calculated by taking one monthly repayment and multiplying this by three. Contract hire means fixed monthly costs for companies. The business will be entitled to use a vehicle for an agreed period of time and a limit on mileage is agreed. The monthly repayments are determined by vehicle type, mileage, purchase price and residual value. Most business contract hire firms, for an increase in the monthly repayment, can take care of maintenance or servicing, so business contract hire can mean less stress. This method means that less company capital needs to be tied up in depreciating vehicles. A company's liquidity ration can be improved by using this way of leasing. Most contract hire agreements are made for a duration of between 12 and 48 months, so if labour requirements alter, companies are not tied into these arrangements for long periods of time. When entering into a business contract hire deal, it's important to have a realistic idea about mileage, and also people should remember that there is no option to buy, when the arrangement comes to an end.
Business hire purchase
Many of the lease deals on offer are hire purchase agreements. HP can be described as a mixture of a loan and a lease. The initial deposit ranges from 10 to 50%, and the balance is paid over a fixed time period. When this period comes to an end, the business will take ownership of the vehicle or vehicles. The residual value of the vehicle is not taken into account and the monthly repayments are influenced by the value of the car, the deposit and the length of the contract. HP means companies can acquire vehicles, that otherwise, they would not have been able to afford. Essentially, the monthly payments are secured against the value of the vehicle, so it is less risky for the lender and these types of car leases are more widely available for the other party. Interest rates can be high under HP, but HP acquisitions, in accounting terms can be of benefit to taxable income.