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FinanceAcar: Home »car finance options » Contract Hire Explained

Business Contract Hire

Contract hire is a form of car leasing for businesses.  It is an ‘operational lease’ that allows a business to lease a company car by simply making a fixed monthly payment for a period that is typically between 2 and 4 years. 

At the end of the lease contract, the business returns the old company car and obtains a new car and lease contract.  Occasionally, here may be an opportunity to purchase the vehicle at the end of the period if done through a third party.

Advantages of Business Contract Hire

Business Contract Hire is a popular option for businesses because:

  1. Contract Hire frees up cash instead of investing it in a non-core depreciating asset since there is  a smaller initial payment required (the equivalent of only 3 months payments upfront);
  2. It avoids having the asset on the balance sheet and avoids financial risk as the business is not committed to the entire cost of the vehicle;
  3. The business spends significantly less each month (as much as 60%) than it would need to spend on a loan or ‘hire purchase’ (it gets a ‘bigger bang for its buck’);
  4. There is no need to arrange or negotiate to sell the vehicle when a new one is required;
  5. There is no market value risk arising from the vehicle because it does not need to be sold in the open market at any point;
  6. The business can select the exact requirements online and have them delivered;
  7. It is certainly cheaper than ownership over the long term if the business needs to run and replace new vehicles more frequently than every five years or less;
  8. The business can include all maintenance and services in the monthly price;
  9. The road fund licence will always be included for the first year of the lease contract and often for the life of the contract; and,
  10. Vehicles can be kept relatively new and this promotes a positive, successful image of the business

Disadvantages of Business Contract Hire

Compared to a business loan or buying the vehicle for cash:

  1. The business is limited to the annual mileage chosen upfront, over and above which excess mileage fees will be incurred;
  2. Contract cancellation incurs penalty fees (which should be determined before the contract is signed; and,
  3. The vehicle can not be modified for any particular business purposes.



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