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To run your business, you may require a new vehicle, such as a car. If you do not have the business funds to buy a company car upfront, leasing a vehicle for your business may be a suitable alternative. This article will examine key considerations before signing a vehicle lease for your business.
What is a Vehicle Lease?
A vehicle lease is an agreement to use a vehicle for a set period for a fee rather than buying it outright. They are also known as a business contract hire (BCH) or finance leases.
A vehicle lease means that you, as a lessee, make periodic payments (e.g. monthly) to a finance company, the lessor, for a fixed period to use the vehicle during that time. The monthly payment amount will depend on how many miles a year you agree you want to drive the vehicle and will often amount to the total value of the car. Likewise, you will also pay a return on capital to your lessor.
Typically, you will need to make an initial payment, like a deposit, when your lease contract begins, between three to nine times your monthly payment. Once the lease period is over, your monthly payments end, and you no longer have use of the vehicle. You will never own the vehicle, including once the lease agreement is over.
Key Considerations
To help you decide if leasing a vehicle is right for your business, we explain key considerations of vehicle leasing below.
Lease Agreement
When leasing a vehicle, you will enter a legally binding agreement. You will sign a contract with the lease provider, lasting anywhere from a few weeks to months, possibly even years. As you commit to the lease car for a specific duration, you must honour the terms of your lease agreement. One of these will be your monthly payments, so it is crucial to be sure you can afford these before you sign the business lease car agreement.
If you do not honour your legal agreement for the business lease car, such as by not keeping up with monthly payments, there will be repercussions. Breaching your lease may even affect the following:
- your credit rating; and
- your use of the car as the lease company may repossess it.
Costs
Leasing a vehicle for your business may be a worthwhile expenditure, depending on your business’ financial position. Your monthly payments may include servicing and maintenance of the car too, which helps you to budget your finances rather than incur an unexpected cost.
If you are unsure whether to lease a vehicle for your business, you may want to consider the cost associated with it, including some of the advantageous features of the cost element.
However, leasing a vehicle comes with costs. When you pay for a vehicle through a lease agreement, you pay more than if you had bought the car outright. Also, unless your company is a sole trader, you will incur company car tax. Likewise, if you run into issues with your payments for a car lease, this affects your credit score. Further, when you hand the car back at the end of the lease term, you risk being liable to pay additional charges if there is any damage to the vehicle.
Legal Ownership
Additionally, you may want to consider the legal ownership of a leased vehicle. As you might be aware, leasing a vehicle for your business means you will never own it. Instead, the finance company is the vehicle’s legal owner throughout your lease and the registered keeper. During your lease, you simply have temporary possession of the car.
Responsibilities
Whilst you are never the owner when you lease a vehicle, you still bear responsibilities during the fixed period of your car lease, including:
- payment of parking tickets;
- cost of speeding tickets;
- car insurance; and
- maintenance costs (if these are not part of your lease agreement), meaning you must keep the vehicle in good working order.
Insurance
When you get a business lease car for your company, as with any business vehicle, you need to ensure you have insurance for it. This is a legal requirement. However, some companies lease their business lease cars with insurance included. You will know if your agreement with the lease provider consists of insurance by looking at the type of package it describes.
The two common names of car lease agreements where insurance is part of the lease contract are:
- complete care package; and
- total care package.
If you do have to arrange your own vehicle insurance, be sure to make it start in time for the delivery time for your car, which your lease agreement states.
Mileage
When you take out a lease agreement for your business car, you will agree on an annual mileage with the lease provider. This will be a legal term in your lease contract, so you must decide on the right amount for your business. The maximum you can usually agree to is 40,000 miles per year.
If you exceed your mileage limit in your business lease car agreement, you will be legally obligated to pay the following:
- excess mileage charge; and
- damage charges that may arise.
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Benefits of a Vehicle Lease
Entering a vehicle lease can be an affordable way to access a car, which improves your business operations and efficiencies. Leasing a vehicle allows you to upgrade after a few years and bolster your reputation and image to clients.
Also, whilst you will pay VAT on your regular payments, you can claim this back for your business journeys with the vehicle. You can do the same for the following:
- fuel costs; and
- mileage.
In terms of mileage, you will agree on an annual amount to use with the vehicle provider. If you go over this, you must pay an excess charge.
Further, a benefit of a vehicle lease is avoiding the large expense of purchasing a car and subsequently feeling the impact of depreciation. You can also include your lease value on the business balance sheet. This means that you can write off against your business profits.
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How to Enter into a Vehicle Lease
A business lease for a vehicle is a contract agreement. If you want to lease vehicles for your business, you will need to be able to prove the following:
- good credit rating;
- show sound profits; and
- be trading at the time you request the vehicle lease.
When you lease vehicles for your business, your first payment is often the largest, similar to an initial deposit. It can be the equivalent of anything from 3 to 12 months’ worth of your typical monthly instalments. After this, you will pay a specific amount in monthly instalments. The payment pattern for your lease vehicle will, for example, be described as ‘4+25’. This explains that your first payment will be 4 months’ worth of instalments and the remainder over 25 instalments.
Key Takeaways
If you need a commercial vehicle but cannot buy one, you might lease a vehicle for your business. As such, you would enter a lease agreement with a lessor, like a finance company, and borrow the vehicle for a fee. While the lessor remains the vehicle owner throughout the time you lease it, you have responsibilities towards it, such as insuring it and keeping it maintained for use.
If you need help understanding how to lease a vehicle, our experienced leasing lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
When you lease a vehicle from a finance company, you borrow it in exchange for monthly apartments and an initial deposit. At the end of your lease agreement, you give the vehicle back.
When you lease a vehicle for your business, the lessor owns the vehicle. You simply borrow it and possess it for your use.
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