Business Contract Hire
Business Contract Hire is a widespread method of car leasing used by businesses. This is because it is seen as being convenient and cost effective for both the business and the employee. Its popularity is proven by the fact that business contract hire provides funding for half of all vehicles registered for leasing.
This method of leasing is also popular with businesses that need to lease whole fleets of vehicles as the terms can be altered to suit varying needs. As with all forms of finance there are certain pros and cons but it is the flexibility offered that makes the funding method so popular among businesses.
The main benefit that entices the majority of businesses is the lower monthly payments that will be made for the vehicles. This makes business contract hire the cheapest funding option for businesses.
Business contract hire has many advantages which include:
- A small initial payment: Often this amount will be two or three times the monthly amount that will be paid for the vehicle. Companies can choose to put more money down for a vehicle in order to reduce the monthly payments.
- Fixed monthly costs: A business will receive the use of a vehicle for an agreed period of time, with a tailored mileage scheme for the set monthly payment. The amount paid each month is influenced by a number of different factors including vehicle type, mileage, the vehicle’s purchase price and its residual value.
- Fixed priced maintenance packages: Businesses are offered the option of a maintenance package which covers the car against any breakdown problems which are then fixed at no extra expense to the business. Maintenance will often cover servicing and repairs. This allows a business to forecast the exact costs of a vehicle as there will be no unexpected repair bills.
- No large investments: Business contract hire allows a company to not tie up capital in their fleet of vehicles. This saves huge sums of money being used to buy vehicles that are going to depreciate over time and that will require managing. Vehicle leasing also doesn’t have to be displayed on a balance sheet so this can improve a business’ liquidity ratio.
- Increased flexibility: When business contract hire is used to fund a fleet of vehicles the company is provided with more flexibility. The average agreement is between 12 and 48 months, so if staffing or business requirements change the company are not stuck with a large amount of excess stock.
- Tax benefits: There are some tax benefits which can be gained from the agreement by offsetting rental charges against taxable profits.
Although there are plenty of benefits from business contract hire there are also some limitations which need to be considered by a company. It is important that a business is realistic about the vehicle’s annual mileage otherwise they can incur heavy charges if the mileage limit is exceeded. An over estimation will also result in higher than necessary monthly fees so it is important to have the ability to accurately judge mileage estimates.
A major limitation of this type of lending is that the employee or the business does not get the option to buy the vehicle at the end of the agreement. Other types of leasing allow the employee or the business to make a balloon or settlement payment at the end of the contract, or, have the ability to re-finance the car.
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