How it works
In return for longer-lasting commitment, competitive repayment terms are offered to the business, ones that are significantly more attractive than a short-term ‘renting by-the-day’ solution could ever provide. There’s also an added advantage with Contract Hire, a business can choose from a much more comprehensive range of cars, often to an exact specification & colour.
To calculate the total balance payable, Business Contract Hire is easily understood when split into two parts. An Initial Payment (known as the ‘Initial Rental’) is engineered for comparison from a multiple of the monthly rental; at the start of the contract. Equal recurring payments (‘Monthly Rentals’) then follow over a fixed period. The total balance repaid is the Initial Rental plus the combined number of monthly rentals all added together, it’s that simple.
If preferred, increasing the Initial Payment reduces (usually on a pro-rata basis) the annual expenditure a business needs to make. Although there aren’t overall savings to be had “paying more upfront” has become popular with sole traders, partnerships & smaller Limited Companies looking to keep monthly motoring outgoings to a minimum.
Once the business agrees on annual mileage, multiplied by the number of years an agreement is to be based upon & forms the ‘total contracted mileage’ for the life of that contract. Higher than average mileages are reflected by increased pricing that considers ‘real world’ influence of a higher mileage on vehicle future values is applied. This way, all types of business user can benefit from a tailored quotation, matching their business needs without ever paying ‘over the odds’.
When the agreement comes to an end, the business hands over the keys & returns the car, assuming the vehicle is returned within the boundaries of reasonable wear & tear, & within the terms of the contract a business agreed to with a lender, there’s nothing else to pay so this is how Business Contract Hire works.
Why Choose Business Contract Hire
Business Contract Hire could best be described as a ‘hedge’ to protect a business against the unforeseen, mainly as vehicle re-sale values are incredibly changeable. Economic downturns & consumer attitudes to a vehicle brand, fuel type or efficiency are particularly damaging to residual values, perhaps critically just at the wrong time when a business wouldn’t wish to be burdened by more significant amounts of depreciation or additional motoring costs. So, because you’ll never own the vehicle with Business Contract Hire future re-sale values & possible car deprecation are no longer a concern to the Business leasing the car.
The purchase price of the vehicle & predicated future values (decided by a lender) are the two most important factors that dictate the whole life costs of a Business Contract Hire agreement. In simple terms, the price you pay calculates from the vehicles estimated depreciation over a fixed period & this explains why we see such variability of pricing for different models, from differing manufacturers but all with a comparable ‘List Value’.
Motoring budgets can now be several years ahead as the financial burden of the agreement is known from the start; many businesses say this is one of the most important reasons they always choose Business Contract Hire. The cost of road tax is also included for the duration of the contract making administration of a vehicle so much easier.
It’s handy to offer employees a choice of car from wide a range of models best suited to their position, circumstances or an agreed budget & one that is benchmarked to an unbiased view for the different distances members commute to & from work. Projected annual mileages can be fine-tuned to suit the needs of each individual driver, with peace of mind coverage for those that exceed the pre-agreed amount in the form of a reasonable pence per mile charge for excess.
Not having to invest large amounts of business working capital into a car can be beneficial, especially if these reserves can be reinvested or redeployed effectively into another area of the business. We have a wide range of options on Initial Payment starting with just 3 times the monthly rental, but also options at 6, 9 or even 12 rentals in advance.
In most cases for an additional monthly cost, Business Contract Hire agreements provide the option to include a maintenance package. Maintenance packages offer comprehensive cover including routine servicing, replacement brake pads, replacement tyres (excluding damage sustained from theft, malicious or 3rd party damage), batteries, exhausts and all other parts that are subject to fair wear and tear. All scheduled maintenance work can be carried out by the retailer network, usually at a retailer of choice. For cars out of warranty, there’s the added value of cover for mechanical fault & breakdown in addition to everyday consumables when you choose to include maintenance. Often maintenance packages can also save a business time, certainly those without a fleet manager. Employees can also take advantage of mobile tyre-fitting, express servicing facilities & a direct billing system whereby there’s no need for a re-charge or use of company account.
Key Benefits:
A low initial outlay, from just 3 months rental
A choice of the rental period, from 24 to 60 months
Road Fund License included within the monthly rental
Exit the agreement, at any time with a pre-agreed termination charge
No depreciation risks or disposal concerns
Allows a proportion of the rentals allowable against tax
Recoverable VAT, dependent upon business VAT status
Maintenance packages & reduced administration costs
The ability to forward plan & budget with fixed monthly payments
A simple ‘hand back’ process at contract finish
Could release more working capital back to a business
Key Areas for consideration:
For whatever reason, charges apply if the business wishes to terminate the agreement early
No pre-agreed ownership option at the end of the contract
Fair & reasonable excess pence per mile charges will apply if exceeding the total contracted mileage
Vehicle damage deemed outside of the fair wear & tear guide will be re-charged to the business
Supplements to VED & changes to tax laws might affect the repayments payable
Fully comprehensive insurance cover, without exception.
Subject to terms and conditions of the agreement
VAT registered businesses, a proportion of VAT is currently reclaimable on the rentals @ 50% of the VAT on the capital element (assuming part private use) and @ 100% of the VAT for any maintenance charges.