Vehicle Leasing Strategies for Start-ups and New Businesses
Updated September 2023, originally published 15 July 2016
Starting a new business comes with many challenges. One significant challenge might be how to meet transportation needs without incurring significant upfront costs. Vehicle leasing presents an attractive solution for start-ups and new businesses.
This article will cover:
- Business Car Leasing Eligibility
- New Business Leasing Options
- Business Car Leasing Benefits for New Business
- Criteria for Business Car Leasing
- Challenges Faced by Start-ups and New Businesses
- Applying for Car Finance with Poor Credit
- Tips for Increasing Your Chances of Approval
- Key Takeaways
Business Car Leasing Eligibility:
To be eligible for a business car lease, applicants must fall into one of the following categories:
- Sole Trader: If you have a bank account registered in your sole trading name.
- VAT Registered Company: Businesses have to register for VAT if their VAT taxable turnover is more than £85,000. They can also choose to register if their turnover is less than £85,000.
- Partnership: If the business has two or more partners actively involved.
- Limited Company, including Private Limited Companies (PLCs) and Limited Liability Partnerships.
New Business Leasing Options
Businesses that are just starting out have two main car leasing options: business contract hire and business contract purchase.
1. Business Contract Hire (BCH)
Business contract hire (BCH) is a leasing arrangement specifically tailored for businesses, enabling them to obtain vehicles without the burden of ownership. Under this arrangement, the company makes fixed monthly rental payments over a predetermined period, typically spanning from 2 to 5 years.
Here’s how it works:
2. Business Contract Purchase (BCP)
Business Contract Purchase (BCP) is a financing option that allows businesses to lease a vehicle for a set period of time, with the option to purchase it at the end of the contract for a predetermined price.
Here’s how it works:
- Vehicle Choice: The business chooses the desired make, model, and specifications for their operations.
- Lease Term: The business and the financing company agree on the contract length, typically 2 to 5 years, similar to leasing.
- Monthly Payment Plan: Fixed monthly payments are made to the financing company based on the vehicle’s purchase price minus any deposit or trade-in value.
- Balloon Payment: At the contract end, a final “balloon payment” covers the remaining vehicle value not paid during the contract, determined based on anticipated depreciation.
- End of Lease Options: At the contract end, the business has three options:
- Purchase the Vehicle: Pay the balloon amount for full ownership.
- Return the Vehicle: Give back the vehicle if it meets conditions and mileage limit.
- Part-Exchange or Refinance: Swap for a new vehicle or refinance the balloon payment for continued use.
Business Car Leasing Benefits for New Business
- Lower upfront costs: Leasing requires a lower upfront cost, freeing up capital for other investments.
- Predictable expenses: Fixed monthly payments make budgeting and financial planning easier.
- Tax benefits: Potential tax deductions and VAT reclamation for business use.
- Ability to drive newer vehicles: Access to the latest vehicles without the commitment of ownershi.
- Limited maintenance costs: Manufacturer’s warranty usually covers any major repairs.
- Flexibility and scalability: Leases offer flexibility to the changing needs of a business.
- Asset management: Leased vehicles are not counted as assets and so do not appear on the balance sheet.
- Reduced depreciation risk: No depreciation concerns.
Criteria for Business Car Leasing
To qualify for a business car lease, you must:
- Be a registered business entity or self-employed.
- Have been trading for at least two years (some companies may require a longer trading period).
- Pass a credit check.
- Be able to afford the monthly lease payments.
- Have a valid driving licence.
- Meet the age requirements (some companies may have age restrictions for drivers).
Requirements may vary among leasing companies, so do check how car leasing works for each you are considering.
Challenges Faced by Start-ups and New Businesses
- Limited credit history: New businesses may be at a disadvantage when it comes to leasing cars because they have less credit history.
- Lack of financial stability: Start-ups may have difficulty leasing cars because they don’t have a proven financial track record.
- Higher interest rates: Leasing companies may charge higher rates to offset perceived lending risks.
- Personal guarantees: Leasing companies may require personal guarantees from directors or owners of businesses with weak credit, making those individuals personally responsible for any defaults.
- Limited vehicle options: Some leasing companies offer a limited selection of vehicles to new businesses, or only offer basic models.
- Length of trading: Leasing companies may require a minimum trading period, such as 6 to 12 months, before approving a lease.
- Required documentation: To demonstrate their viability, start-ups may need to provide additional documents, such as business plans and financial projections.
- Competitive market: It may be more difficult for new businesses to get good lease terms than for established businesses.
To overcome challenges, consider:
- Provide a solid business plan and financial projections to demonstrate potential for success.
- Offer a larger upfront deposit to increase approval chances.
- Seek specialised leasing companies catering to start-ups and new businesses.
Applying for Car Finance with Poor Credit
Businesses with very little credit history may have difficulty getting financing from traditional lenders. However, there are specialist companies that offer car finance to businesses with bad credit.
When applying for bad credit car leasing, startups and new businesses will typically be required to provide additional documentation and information, such as:
- Trading history
- Management accounts
- Bank statements
- Contracts related to sales and supplier arrangements
- Track record and career history of key individuals
- Profitability forecasts and projected cash flows
- Business plan
This information will help the lender to assess the risks associated with lending to a company with no credit history. The lender will look for evidence of financial stability, operational stability, and management expertise. They will also want to see that the business has a clear plan for success.
Tips for Increasing Your Chances of Approval
Here are some tips for increasing your chances of approval for bad credit car leasing:
- Be prepared to provide all of the required documentation and information.
- Make sure that your business plan is well-written and realistic.
- Be honest and upfront about your financial situation.
- Be willing to negotiate on the terms of the lease.
- Consider getting a personal guarantee from a director or owner of the business.
If you have poor credit history, it may be more difficult to get car finance. However, there are specialist companies that offer car finance to businesses with bad credit. By following the tips above, you can increase your chances of approval.
Compass Vehicle Services specialise in bad credit car leasing, offering affordable bad credit car finance for businesses and individuals with poor credit.
- Vehicle leasing is a great way for start-ups and new businesses to get the transportation they need without a large upfront cost.
- To qualify for business car leasing, you must be a sole trader, VAT registered company, partnership, or limited company.
- There are two main types of business car leasing: Business Contract Hire (BCH) and Business Contract Purchase (BCP).
- With BCH, you pay a fixed monthly rental fee for a predetermined period of time, and then return the vehicle to the leasing company at the end of the lease.
- With BCP, you make fixed monthly payments, and then have the option to purchase the vehicle at the end of the lease, return it, or part-exchange/refinance it.
- Business car leasing offers a number of benefits, including:
- Lower upfront costs
- Predictable expenses
- Tax benefits
- Access to newer vehicles
- Limited maintenance costs
- Reduced depreciation risk
- To qualify for business car leasing, you must meet certain eligibility criteria, including:
- Being a registered business entity or self-employed
- Having a minimum trading period (some leasing companies may require this)
- Passing a credit check
- Being able to afford the monthly lease payments
- Having a valid driving licence
- Meeting any age limits (some companies may have these)
- Providing an estimate of your expected mileage requirements
- Start-ups and new businesses may face some challenges when leasing vehicles, such as:
- Limited credit history
- Lack of financial stability
- Higher interest rates
- Personal guarantees (some leasing companies may require this for businesses with limited credit history)
- Limited vehicle options
- Competitive market conditions
- There are a number of things you can do to overcome these challenges, such as:
- Providing a solid business plan and financial projections
- Offering a larger upfront deposit
- Seeking out specialised leasing companies that cater to the needs of start-ups and new businesses
- Exploring alternative financing options, such as asset-based lending or invoice finance
- Partnering with established businesses or co-signers with strong credit histories
- If you have poor credit history, you can still explore bad credit car leasing options provided by specialist companies. These companies assess risks through a variety of factors, including your business plan, financial projections, and management team.