Business is about choice. It is wrapped up in statistics, reports and endless meetings, but when it comes down to it, it is about choice. The choices you make ensure you get the best deal for your company, your customers, and your employees. One such choice is which is the best way of getting a fleet of company cars for your business to use. Do you buy your cars or do you lease them?
Not so long ago, you would purchase these cars outright in individual lump sums for each car. This explains why cars were formerly marketed as being sold at full price. You could purchase a Ford Fiesta for £12,000 for example. This required you to have large amounts of spare funds available to make those transactions.
However, with change comes more choice and now the choice is aplenty. The option of purchasing cars outright is still available to you as a business, but you can now choose to finance or lease your fleet of cars also. These alternatives do not require you to store large sums of money ready to pay off those cars in one go. Now, you just need to be able to budget effectively on a month by month basis.
Buying in one go
The option of buying outright will never vanish. If you have the necessary funds, it might seem sensible to purchase your fleet in one go. However, there are downsides that match the positives. The positives are that you take immediate ownership and do not pay any forms of interest.
On the other hand, you have no flexibility. You are the owner of the vehicles and must, therefore, deal with the depreciation in value that occurs almost immediately, plus the possible disappointment in the cars themselves, with no option to return.
To lease or to finance?
Cars are now marketed very differently. You rarely hear about the full price of a vehicle in adverts, posters, and leaflets. It is all about the monthly price you pay to have access to that car. This is down the car market changing as a result of demand. This demand has led to the rise in car leasing and finance options.
The reason for the change in demand is down to available funds. Due to the way the economy has changed with regards to wage stagnation, living costs rising and the fact banks are not lending to small businesses means most don’t have large amounts of available cash on hand. This means other options like finance and leasing on a monthly basis has had to come about.
As more and more people take up these agreements due to being more affordable and easy to manage, the demand has forced car manufacturers, dealership, and lenders to adapt and offer these sorts of monthly agreements.
These options are similar and they relate to how we pay for other aspects of our lives including Netflix, gym membership, and even road tax for some. It would be foolish to not allow you to gain access to cars through monthly payments also.
Finance agreements are another form of buying
Finance agreements are designed for you to buy the car in a more affordable fashion. Most business, especially small and newer business struggle to have the necessary cash to purchase cars outright. This is where finance options step in.
The likes of Hire Purchase (HP) and Business Contract Purchase (BCP) allow you to pay off the value of a car over the duration of an agreement. These agreements usually last between 24-48 months, with some lasting up to 60 months under certain circumstances.
Hire Purchase agreements
If as a business, you wish to own the cars, a HP agreement is the best choice. You can place a deposit (not necessary) and pay a series of monthly payments for the remaining duration. How these agreements end is where the difference lies. With a HP agreement, you do not pay anything when it comes to an end. The monthly payments you pay as a result of a HP agreement cover the full value of the car, so when you reach the end, you will have paid that full value.
BCP deals are different and in fact, straddle the line between a finance and leasing agreement. Whilst officially it is a finance option, it offers more flexibility than a HP agreement. You will have the options to pay a Guaranteed Minimum Future Value (GMFV) or balloon payment at the end, which allows you to take full ownership of the vehicle.
This GMFV is calculated at the beginning of the BCP agreement and is an estimated value of the car after you have driven the car for the duration of the agreement. If you wish you do not want to pay the GMFV, you can return the car without further payment as you do with a leasing agreement.
Leasing is the escape from depreciation
Leasing is not about car ownership. It is about car access. Owning a car is no longer the priority that it once was. What people want is access to a car. This does not necessarily require them to own it. Leasing agreements, such as Contract Hire allows you to have access to a car for an agreed period before handing the car back.
Contract Hire agreements work in similar fashions to Hire Purchase agreements. You have the option of paying a deposit followed by a series of monthly payments. The difference is that when the agreement comes to an end, you do not keep the car. You must return it to your lender. This is the reason why leasing payments are often much cheaper than finance payments.
With finance agreements, you are paying off the entire value of the car. With car leasing agreements and BCP deals, the payments you make are covering the depreciation of value on the car rather than the value itself. This means that because the value of depreciation is always lower than the value of the car, the monthly payments will always be lower.
You have that choice to make
As a business, you have priorities you need to decide on. These priorities lead the choices you make. If ownership of your car fleet is a priority, then finance options such as Hire Purchase and Business Contract Purchase are the best route for you to go down. If having access, but not ownership of your car fleet is more important, then Contract Hire leasing agreements would be a more suitable choice. These are issues you can weigh up.
Hippo Leasing has a brilliant collection of cars that cover every make and model from 2010 to present. Supplying both leasing and finance options for all their cars, so if you find a car you want in your fleet, enquire with them and their dedicated team will find the best deal for you.