Business Contract Hire (also known as BCH or business lease) is a long-term rental, whereby you pay a fixed monthly amount to rent the vehicle over a specific term (usually 24 to 48 months).
Fast growing to be one of the most popular ways to source any number of vehicles for your business, it is the perfect solution to making sure your business looks as professional as possible. It’s also highly beneficial if you change your vehicles regularly, so you don’t have to keep departing with your capital or worry about depreciation costs.
At the end of the agreement, you simply hand the car back, eliminating the risk of the depreciation, the outlay it takes to buy a vehicle outright and the disposal of the vehicle when you want or need a new one.
So how does it work?
The monthly cost is calculated by a number of contributing factors:
1. The vehicle's value
The vehicle’s value is one of the biggest factors to the price. The value is where the cost starts to be calculated, so if you look to lease a low value vehicle, you’re likely to have lower monthly rentals.
2. The term
This is how long you want the vehicle for, the most popular choices being between 2 and 4 years. However, there are options from 12 months up to 5 years.
3. Your mileage
The higher the mileage on the vehicle, the less it’s worth, so we need to know how many miles you will do over the term. The lower the mileage, the lower the monthly rental.
4. Residual value of the vehicle
This is the value of the vehicle at the end of the term. When looking at a vehicle, the finance company will predict how much it is going to be worth after your agreement has finished. If it’s predicted that the vehicle will hold its value, then that will have a beneficial impact on the monthly rentals. Because your rental is fixed, if the vehicle depreciated more over the term than predicted, you are not affected!
5. Interest rates
The interest rate within the contract affects the total payable. Due to the ever-increasing number of deals and popularity of leasing, interest rates are getting better and better.
Over the term there is a certain amount payable. It is then up to you if you want to pay a chunk up front, and the rest over the term. The more you pay up front, the less you pay over the term, meaning a lower monthly rental.
Benefits of BCH
- Your monthly rentals are fixed every single month, from start to finish
- Access to more variety of vehicles
- You can choose from 5,000 - 50,000 miles per annum
- You choose the initial rental, putting down as much or as little as you like up front
- Flexible terms, allowing you to choose how long you have the car for (from 12 months to 5 years)
- Road tax included for the full duration
- All cars are brand new and come with a full manufacturer's warranty
- You can include a maintenance package that will cover you for routine servicing, MOTs, tyres, brake pads etc
- Claim 50% of VAT of cars & 100% of VAT on commercial vehicles, as well as 100% of VAT of any maintenance costs
Considerations for BCH
- Early termination fees can be expensive
- No option to buy the vehicle
- You must return the vehicle in a well maintained condition
- You may not be able to predict your annual mileage
- The vehicle must be insured full comprehensive
- You may have to pay for damage caused to the vehicle during the agreement
- If you go over your agreed mileage, you will have to pay a charge per mile
Claiming back your VAT
Contract Hire is a very popular choice for VAT registered companies, as they can claim back 50% of the VAT on the rental for cars and generally 100% for commercials (subject to no private use, no exempt turnover and not being on the Flat Rate VAT Scheme).
On contracts with maintenance, the VAT on the service element is 100% recoverable. You can also generally 'off balance sheet funding' (subject to legislation change), which means it can improve your gearing ratio (assets to borrowing ratio) and therefore possibly your borrowing ability in the future.
What happens at the end?
At the end of the contract the vehicle is handed back to the finance provider, with no financial obligation to you, meaning you are free to source your next car in any way you see fit, be it lease, finance, purchase etc.
When your lease comes to an end and the vehicle is collected, you may face potential charges. One charge that you may face is an excess mileage penalty. This is issues if you go over your agreed mileage, but you'll know how much each mile is going to cost you at the point of sale.
A charge may apply if the vehicle is given back damaged or mis-maintained (i.e. serviced with incorrect parts or handed back with bald tyres) beyond the established industry standard, set by the BVRLA (British Vehicle Rental and Leasing Association). This is know as Fair Wear and Tear. You can find out more about Fair Wear and Tear here.