Everything You Need to Know About Business Car Finance

Getting a car for your business is not quite the same as obtaining personal car finance. With tax and accounting benefits, as well as slightly different structures that help with managing a fleet of vehicles, business car finance has its own nuances that are important to understand if you’re going to make the most out of your funding opportunities.

In this guide, we compare the main options available to businesses, ranging from hire purchase, to finance leases and operating leases, and look from the perspectives of vehicle ownership, costs, tax benefits, and more.

Business Car Finance - The Basics

Business car finance covers a range of specialist asset-finance products designed to make it easy to afford vehicles by spreading the cost of a car over the months of its use.

The main options include:

Hire Purchase (HP) - A standard option for those looking to own the car outright at the end of the contract. HP can feel a lot like an asset-based loan although the structure is slightly different to a loan. As the car is used as security, HP typically has better rates than an unsecured business loan to cover the same cost.

Finance Lease - Sometimes compared to the personal car finance option of personal contract purchase (PCP), finance lease offers similar low monthly costs based on depreciation, with an option to extend the lease for the very long term. Unlike PCP however, finance lease does not provide an option to own the vehicle.

Operating Lease - Essentially a lengthy rental agreement, operating leases provide low-cost financing for the use of equipment that’s owned by a third party, avoiding risks such as depreciation and resale. Additional maintenance packages provide worry-free car use.

The 6 Benefits of Business Car Finance

Business car finance is a key method that gives companies the buying power they need to smoothly do business, using the latest vehicles for safety, cost-efficiency, and to look professional.

Buying Power

Using business car finance gives you far more buying power than capital alone - as well as making sure you’re not tying up that all-important capital.

With a strong business credit score and comprehensive accounts, your business will be able to obtain high-end cars that are perfect for presenting yourself to clients as a successful business - as well as being enjoyable to drive.

By spreading the cost of vehicles across the month, it’s also far easier for businesses to develop a fleet of cars.

Cash Flow Management

Cash flow is one of the most important aspects of business accounting. By choosing the right car finance for your business, you ensure that cash flow is smoothed and you have the ability to deal with any financial issues that come up in the future, as well as take advantage of opportunities that come your way.

By opting to spread the cost of vehicle use, important capital is left for business expansion.

Employee Perks

A company car is a valuable perk for employees. Though there are personal tax implications for those with company cars that are used for personal purposes, it is still a more cost-effective option than personal car finance would be.

Team members with company cars will appreciate the benefit, often increasing loyalty and morale.

Operating Expenses

Some car finance options, such as operating leases, allow you to keep the car off the balance sheet, treating it as an operating expense rather than a listed asset. This benefit makes for simpler accounting under FRS 102 and helps present your business finances in a positive way for investors.

VAT Benefits

For VAT-registered companies, some business car finance options allow VAT to be reclaimed. For operating leases, VAT on monthly payments can be reclaimed in full for vehicles used exclusively for business, or up to 50% for mixed-use vehicles. With HP agreements, VAT on the vehicle’s purchase price may be similarly reclaimable.

Fleet Management

Many business car finance products can be structured to develop large fleets of vehicles. This includes:

• Combined monthly payments to simplify budgeting and administration
• Regular vehicle upgrades and replacements at the end of terms
• A fleet made up of a variety of vehicles to suit business need
• Comprehensive fleet-wide maintenance packages
• Temporary replacement vehicles if cars are off the road for any reason
• Business-level support

To streamline management, many businesses use fleet management software. This software integrates your systems with the car finance agreements, tracking car usage details, such as mileage and servicing, to ensure everything is in order and to be ready for upgrades as needed. 

Comparing Business Car Finance Options

How do the main business car finance options stack up against each other? Here are the differences between them, and the pros and cons of each.

Feature	Hire Purchase (HP)	Finance Lease	Operating Lease
Ownership	Business owns the car after final payment	No ownership, only long-term use	No ownership, purely rental
Deposit Required	Typically 20% (negotiable)	Required, amount varies	Required (3-9 months upfront)
Monthly Costs	Higher than leases	Lower than HP	Reasonable, varies with maintenance options
Final Payment	Mandatory balloon payment (if structured)	Optional balloon/refinancing	No final payment
VAT Reclaim	Full VAT reclaim upfront (if 100% business use)	VAT reclaimed on each payment	VAT reclaimed on each payment
Accounting Impact	Asset on balance sheet, increases liabilities	Asset for larger firms, operating expense for micro firms	Purely operational expense (no asset on balance sheet)
Maintenance Responsibility	Business is responsible	Business is responsible	Can include maintenance for worry-free use
Usage Restrictions	No restrictions	Mileage and condition limitations	Mileage, condition, and usage restrictions
Flexibility	Flexible terms and payment structures	Multiple end-of-contract options	Shorter, flexible contract lengths
Credit & Approval	Easier due to car as collateral	Subject to affordability checks	Requires good credit & affordability stress tests
Best For	Businesses seeking ownership	Long-term users wanting lower monthly costs	Hassle-free car use without ownership concerns

Hire Purchase - Business Car Finance for Ownership

HP - Overview

It is important to note that business HP is not a loan. The financing is structured in a very similar way, but throughout the contract the car legally remains the property of the finance company, becoming owned by the business only at the end of the contract (and the payment of a nominal fee to transfer ownership).

Business hire purchase agreements can be structured in a flexible way, with larger payments (referred to as ‘balloon payments’) at both the start of the contract and the end, each with a view to lowering the regular monthly payment. A larger initial payment, or deposit, will mean the total financed is lower, resulting in lower interest payable across the term as well as a smaller monthly repayment total, while a larger end balloon payment will decrease the monthly payment though it has no impact on the interest (as it doesn’t affect the initial sum of the finance).

The final balloon payment for a business hire purchase agreement is not optional, unlike personal balloon payments with personal contract purchase car finance, although if you are struggling to meet it, refinancing options are available.

As with all financing, if you are finding the cash flow to make any of the payments difficult, it’s best to communicate early. Speak to a business funding advisor at Clifton Private Finance for in-depth advice and to access a wide range of refinancing and cash flow finance options.

HP - Pros and Cons

• Full asset ownership
• No limitations on use
• Flexible term lengths and balloon payment structure to suit business needs
• Favourable interest rates compared to unsecured loan options
• Immediate VAT rebate
• Greater monthly payments than other car finance products
• Large deposit required
• Balance sheet liability
• Business is responsible for all maintenance

Finance Lease - Business Car Finance for Long-Term Leasing

Finance Lease - Overview

At the end of a finance lease term, the car can be either sold on (with any profit rebated to the business), or refinanced to the end of its useful life, either with a single refinancing balloon payment, or secondary rental agreement. This flexibility allows for either continued use of the car, an ending of the contract, or an upgrade to a new car.

Finance leasing shares a great deal of similarity with operating leases; however, a finance lease is designed for longer car use, while an operating lease is typically shorter term.

Like hire purchase, finance leasing requires an initial payment, or deposit, and in a similar way, this deposit lowers the balance of the finance, reducing monthly payments and accrued interest in a similar way. Final refinancing balloon payments for finance lease agreements are optional.

As the car in a finance lease remains the property of the finance provider, care must be taken to keep it in good working order throughout. Failure to maintain the vehicle to a standard of reasonable wear and tear, or to go over any agreed mileage limit will result in additional fees at the end of the contract.

Finance Lease - Pros and Cons

• Low monthly payments
• Long-term asset use, similar to ownership
• End of contract options for flexibility
• Favourable interest rates
• Classed as a business operating expense for micro companies
• Business is responsible for maintenance
• Mileage limitations
• Potential for other limitations on use
• Balance sheet liability for larger businesses under FRS 102 or IFRS

Operating Lease - Business Car Finance for Worry-Free Use

Operating Lease - Overview

Many operating leases are tied with a maintenance contract. These can be as simple as minimal options to cover servicing and tyres, through to comprehensive maintenance deals that encompass every aspect of car responsibility. With a full maintenance contract, an operating lease is completely worry free - should your car need any sort of work done on it, a replacement is provided while it’s in the garage, including pick up and delivery.

For businesses looking to use vehicles without any of the problems inherent in car ownership, an operating lease with maintenance is the perfect solution - although fully comprehensive insurance must still be obtained.

Operating leases offer competitive rates, often as cheap as finance lease agreements even with maintenance added. Full maintenance additions, however, will increase the size of the monthly payment. Like the other forms of car finance, an upfront payment or deposit will be required, typically calculated as 3-, 6-, or 9-months upfront. Larger deposits will lower the size of monthly payments.

The length of an operating lease can be quite flexible, with many leases available from one to three years, making it a good option for businesses who like to regularly re-evaluate the marketplace and upgrade to newer vehicles.

Cars under operating leases are subject to limitations as stipulated by the finance company. Typically this includes a mileage limitation, which will result in fees if broken; a responsibility by the business to keep the car in excellent condition, again with fees if the term is breached; and limitations regarding taking the car out of the country, with vehicles usually limited to UK or UK/EU only.

Operating Lease - Pros and Cons

• Reasonable monthly payments
• Flexible upfront payments
• Worry-free maintenance agreements
• No ownership issues
• Easy administration and accounting
• No balance sheet liabilities
• No final balloon payments
• Requires good business credit history and affordability stress tests
• No long-term use or eventual ownership
• Not always the cheapest option 

Business Car Finance Eligibility

The range of business car finance is quite flexible and designed for every business, this includes:

• Limited companies
• Public limited companies
• Sole traders
• Partnerships

Size of business and turnover do not typically limit eligibility for car finance.

The greatest factors for business car finance application are business credit history and affordability.

For the lender, the risk of car finance is reduced thanks to the use of the car as security on the finance - in all cases, the finance provider has the option to repossess the car should repayments not be made. However, the business credit score and affordability stress testing are also essential to ascertain a full risk profile. Poor credit rating or struggling with cash flow (expressed as a high debt service coverage ratio or DSCR) may result in your car finance application being rejected.

These factors are especially relevant for operating lease finance, where risk to the lender is somewhat higher.

Negotiation is possible. Larger deposit payments show an investment from the business and can help secure a car, especially for hire purchase. As is typically true with all business finance, poor credit scores and weak DSCR will result in higher interest rates and more stringent terms.

At Clifton Private Finance, our business car finance experts have an in-depth understanding of the full market of providers and their products - including those for rarer car types. Specialist bad credit business car finance is available for those who might otherwise struggle to obtain car finance. Speak to one of our dedicated team today for help finding business car finance to suit you. 

Applying for Business Car Finance

While many car dealerships offer car finance, it’s always best to shop around and get business car finance that has been tailored to your specific business needs.

At Clifton Private Finance, our expert team are on hand to help you get the car finance that’s right for your business. Our specialists understand the finer nuances of car finance, from how to set up a well-run fleet through operational leasing, to helping sole traders use hire purchase to obtain an all-important company car that’s available for both for business and personal use.

With established relationships with the top car finance providers in the country, working with Clifton PF means getting access to all the best finance at the best possible rates.

We can even help you through the application itself, working together to get the paperwork in order and present your business in the best possible light to obtain the highest value deals. Remember, how your company is perceived by the lender has a direct impact on your application and the interest rates you’ll be offered - by using Clifton Private Finance, you’re assured the lowest rates available.

Once you have business car finance, building on it to add vehicles for other team members until you’re running a dedicated fleet for your company is effortless. 

Business Car Finance FAQs

Do I need good credit history for business car finance?

What happens if I exceed the mileage limit on a lease?

Is maintenance only included in operational leases?

What is the best business car finance option?

Can I get a business car finance deal with no upfront cost?

What if a lease car is stolen or written off?

Can I alter a lease car with decals or wraps?

Business Car Finance with Clifton Private Finance

Clifton Private Finance are specialise business finance brokers with a dedicated team of car finance specialists able to help you through the entire car finance process. If you’re looking to expand your business with a company car, we can help you get on the road with the best rates and most suitable finance deal. Contact us today.