Looking for your business’s first company car? It’s a big milestone, but it could be expensive. This guide will show you exactly what to expect and will talk you through all of your options.
In basic terms, there are four ways to get a car for your business. You can buy one outright with your profits, take out a loan, lease one, or get it on Hire-Purchase. That’s a lot of choice – but which one will work best for you? Let’s take a look to find out…
Before We Begin
Before we get into the meat of this article, it’s important to point out one major thing. When you get a car for your business, there are two ways of doing so. The first is ‘pooling’ the car. This means that anyone in the company can use it, and it is not for the exclusive use of a single person. We’ll be looking at getting a vehicle for a carpool throughout this article.
The other option is to get it for an individual to use. There are various tax implications for single use company cars that you need to be aware of. We’ll touch on a few points, but if you want some more info, a good starting point would be this article on the official government website.
If you have the cash-flow, then buying a car outright may seem like the ideal thing to do. A single payment, and it’s yours for as long as you want it. It is also the cheapest option when you consider the length of time you will keep it. Let’s say the average car lasts for around ten years, and you spend £20,000 at the outset. Spreading the initial cost over 240 months makes a payment of less than £85 per month.
But as we all know, owning a car isn’t quite as simple as that. Repairs and running costs can quickly add up, meaning you may spend a lot more over the ten-year period. You also have to consider the tax implications, as a new company car is an asset for your business. In the first year, this can go on your balance sheet, but as its value decreases each year, the depreciation will be added to your profits.
It is also a huge investment. You need to ask yourself if the initial outlay is worth it, and if you could save your business money to be used elsewhere. You will have limited choice, too, depending on how much cash you have at hand.
Leasing A Car
Leasing a car is a great option if you are struggling to raise an initial payment. It has low monthly costs which are fixed over a specific term – usually around three years. Many businesses take advantage of lease cars because they can afford a much better car than they would be able to buy upfront. Depending on the type of lease, you could also have maintenance included in the plan. This is great for budget planning, as you can plan for the costs over a specific period, without worrying about repairs.
All payments are deducted from your tax bill, and leasing is a great way for a small business or startup to get hold of a company car. If you want to see some examples of what’s on offer, take a good look around online. Comparison sites such as MoneySupermarket can help you get an overview of the costs, or you can go straight to car manufacturers like BMW and enquire with them directly. There’s a good indication of the costs involved available on the website of Listers.co.uk.
There are disadvantages, however. Although leasing is usually a cheaper monthly cost than hire-purchase, you won’t own a vehicle at the end of the term. There are also limits to the amount of miles you can do, and if you drive too far you could face expensive charges. Finally, contract terms and conditions are often hard to decipher, so make sure you know the full details of the contract before signing up.
Hire-Purchase loans are when you pay for a company car over a fixed term. Once the term has finished, your company will own the car. There are some great advantages of the hire-purchase system. It enables you to buy a better car than you could afford to pay for in one lump sum. Your cash flow burden will lighten, and you can budget well with the fixed monthly payments. Also, it is usually easy to get finance, as the loan is secured on the vehicle.
Tax implications for H-P cars are usually straightforward. The amount of interest you pay comes off your balance sheet, and when the payment term is complete, the car turns into a company asset.
There are a few things to bear in mind, however. You will pay a lot more in interest over the fixed period, and could face an option to buy fee at the end of the term. You will be stuck in the contract for its duration, and if you have any problems with missing payments, the car could be repossessed.
Get A Loan
Your final option is to get a business loan to cover the costs. There are some major benefits. Firstly, it allows you to buy the car outright and pay back the loan over a fixed period. You’ll know what you need to pay each month and can have a tight control over your budget. It also means that you aren’t restricted to buying a brand new car. So, if you get a loan and find a second-hand model, the rest of the loan can be used to improve another area of your business.
All the interest on the loan is tax-deductible, and the car turns into an asset. Depreciation adds to your annual balance sheet, although you can claim capital allowances. You can find more info here.
The disadvantages of taking out a loan to buy your company car are straightforward. Firstly, business loans are usually unsecured. Unsecured loans can be expensive, especially if you haven’t managed to build up a good credit score. This is a common problem for startups and new businesses, so if you are just starting out you might need to consider a different option.
So there you have it – you should have a much better idea of your options now! Take the time to write down some figures and work out the best way to go about getting a vehicle. Happy hunting!