Vehicle leasing advice for start-up businesses

Leasing a work vehicle could be a viable option for your start-up business


New start-up business registrations are on the rise, with 2014 seeing the creation of over 581,000 new companies and this number continuing to rise.

The chance to pursue a personal passion, be your own boss or work more flexible hours are just some of reasons people look to start their own business.  However, once these ventures are created there are a lot of aspects to consider.

For many businesses, a vehicle is an essential tool of trade rather than simply a conveyance for travelling to work. Fashion may be nice but function is essential. However, with all the other associated expenses of starting up a new business, purchasing a new vehicle may hardly be viable. This is where the option of leasing comes in.

Leasing a vehicle may be an option for your start-up business

By leasing a vehicle, you can usually drive a brand new van or pick-up – or car – for a much lower cost than if you were to purchase the same model.  You can also incorporate your maintenance and servicing costs into a single monthly payment.

A lease usually involves an initial payment when you start the agreement, and then regular monthly payments over the course of the lease.  At the end of the term (usually 24, 36 or 48 months, although other options are available), the vehicle goes back to the leasing company. You are essentially renting the vehicle over the term rather than paying towards eventual ownership.

Depending on how your business operates, there can be tax benefits to leasing a vehicle rather than owning one, especially when the vehicle is a tool of trade.  Your accountant will be able to advise on what the pros and cons for your situation will be.

Before rushing down to the dealership…

Before getting too far ahead of yourself, it’s important to assess the situation.  Being approved for finance as a start-up can often be difficult, as a lack of trading history for your new business means a finance company can’t see how good you are at keeping up with your financial obligations.  Finance companies will be assessing the risk of you defaulting on your lease when they consider your application.

There are a few things to keep in mind and be prepared for when you start the application process.  As well as being good business practice anyway, having the right documentation available when you are applying for a lease will significantly improve your chances of being approved.

Documents you will need for a vehicle lease application

What you will need to prepare
– An opening balance sheet
– Proof of trading
– Be prepared to offer a personal guarantee

To be considered as a start-up you will need
– At least three months of management accounts information
– A directors guarantee as a minimum sanction of any leasing approval

Other factors which will be taken into account
– Previous business history: for example, you were in a partnership or were a sole trader and have now become a limited company with the assets transferred – so you are effectively the same company but a new entity
– Where initial investment is considerable (£1m+) and can be proven in opening statement of affairs
– Previous poor credit history or failed businesses

Remember that, even if you have all the above information available and it presents a glowing picture of your new business, some finance companies simply have a policy of not financing businesses that have been trading for less than two years.

Also be aware that there are usually tough penalties for early termination of most leasing agreements, so you need to be confident that you will be able to afford the monthly payments for the whole term of the lease.  This can be be difficult to judge in a start-up business when your future prospects may be uncertain, so it is important to not overstretch your business cashflow and ensure you are leasing a vehicle that you can comfortably afford to pay for.

Most vehicle finance agreements in the UK are regulated by the Financial Conduct Authority, and anyone involved in the selling of car finance must be accredited by the FCA.  You should always consider the terms and conditions of any agreement carefully before taking out any form of vehicle finance, as you are making a substantial ongoing commitment and there may be significant costs if you change your mind or are unable to meet your commitments at a later date.

What are your thoughts? Let us know below.

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