A Guide to Business Car Leasing
A Guide to Business Car Leasing
Many businesses choose to lease a car, one of the main influencing factors is the ability to secure a car for business use without having to tie up thousands of pounds in capital. Here's a guide to business car leasing.
A business car will leave a lasting impression on past, current and future clients, how you arrive to meet them is included in their first impression of the company the car represents.
We always advise any business customer to obtain financial advice from their accountant as we don't offer any taxation advice. We draw attention to the tax implication surrounding benefit in kind taxation which is calculated based on the vehicle emissions, p11d value and the percentage of tax that the driver currently pays via payroll. If you don't have access to a regular accountant for advice, you can use online calculators to help determine how much each lease car will cost the driver in tax each month.
VAT registered business can reclaim 50% of the VAT on the rental element and 100% of the VAT on any maintenance element, given a reduced effective rental.
It's important to be upfront with how your business trades as this could significantly reduce the time it takes to process your application with the funder.
How does your business trade?
How your business trades will determine what information is required along with what supporting documentation may be needed to support the application. The 4 separate trading styles are:-
- Sole Trader
- Partnership
- Ltd/PLC/LLP
- Charity
A Sole trader is treated similar to a PCH (Personal contract hire) applicant, whereby you're mainly assessed as an individual with an affordability check and credit check with credit reference agencies. Some funders may also require proof of trading in the form of a VAT registration number, proof of NI contribution payments to HMRC or 3 months business bank statements.
A Partnership application is very similar to a Sole trader application, whereby both partners are credit searched along with relevant affordability checks.
A Limited, Public Liability company and Limited liability Partnership credit application will involve more in-depth analysis of the business. The businesses previous accounts, net worth and hos it's currently trending. Some funders may also run a personal credit search on the Directors of the company too.
Understanding the Underwriting Criteria
It's important to understand how a business trades along with the length of trading to ensure that the application is being placed with a funder that's likely to approve the business for a car lease.
The rates that are advertised on the website are not just through one funder. We advertise the lowest rental for each vehicle, but of course all underwriters criteria is different. Whilst this is positive in one instance - If you're declined with one, that doesn't necessarily mean you'll be declined by all. It can be negative as a rate that's advertised may be through a lender that you don't reach their criteria.
Here's a few short examples of how funders lending criteria differ.
Sole Trader. If applying through VWFS you'll be subject to a credit search and affordability checks, there's no minimum trading time, If applying through Arval, there's a minimum trading time of at least 3 months as you must provide at least 3 months of business bank statements, these statements must show a healthy income with a positive monthly balance.
Partnership. These applications are treated more or less in the same way as a Sole Trader application, but involve credit searches and affordability checks on both business partners. Even though the vehicle may be driven by only one partner, both partners are responsible for that vehicle lease by law.
Ltd/Plc/LLP. A business must be trading for at least 2 years for Lex Vehicle Leasing to even consider the application. Whereas a new start company would be considered by Arval on a terminal pause basis alongside 3 months strong business bank statements.
Charity. A charity application is treated similar to a Ltd/LLP/Plc application, whereby the fundamentals of the business are dissected as opposed to the Director or CEO personally.
A Terminal pause agreement enables the finance company to minimize their risk and consequential exposure to the finance agreement.
It's particularly common for new start up businesses or those with a negative net worth or downward trend in their accounts.
The more commonly known agreement would be with spread rentals, we'll take a three year agreement as an example. A terminal pause would be 3+33, whereas spread would be 3+35.
New start companies accepted on finance may be offered a conditional TP of 9+27 over 3 years. This is still a 3 year agreement, but with more money paid in advance. An initial rental equivalent to 9 rentals in advance, then 27 equal repayments. This means that there's 8 months where you'll not make payments on the lease but you'll still have the lease car, as those payments were made in advance to minimize the finance companies exposure.
Usually a TP (Terminal Pause) agreement will reduce the overall cost of the lease. Whilst the monthly payment will appear higher, if you compare the cost of the spread agreement (3+35 = 38 divide by 36) against a (3+33 = 36), then you'll find that as the 3+33 pays the full balance of the car lease in advance the interest overall will be slightly less so the cost will be slightly less overall.
