Business Contract Hire vs Business Contract Purchase

Published 2 August 2023

In the world of business, making the right financial decisions is paramount to achieving long-term success. When it comes to acquiring vehicles, two popular options that offer considerable advantages are Business Contract Hire (BCH) and Business Contract Purchase (BCP). These financing methods have distinct features tailored to meet various business needs. This article aims to shed light on the similarities and differences between BCH and BCP, enabling business owners to make informed decisions that align with their requirements and financial objectives.

Similarities between Business Contract Hire and Business Contract Purchase

• Business-focused Solutions

Both Business Contract Hire and Business Contract Purchase are designed primarily for business purposes. They cater to companies seeking cost-effective and flexible ways to acquire vehicles without the substantial financial outlay associated with purchasing the vehicles outright. This enables businesses to allocate capital more efficiently and focus on their core operations.

• Fixed Monthly Payments

In both BCH and BCP, businesses can enjoy the convenience of fixed monthly payments over an agreed contract term, typically ranging from 12 to 60 months. This predictability helps with budgeting and financial planning, ensuring businesses can manage their cash flow more effectively.

• Maintenance Packages

Many BCH and BCP agreements can include optional maintenance packages, providing businesses with the convenience of having vehicle servicing, repairs, and roadside assistance covered under a single, fixed monthly cost. This allows companies to minimise unexpected expenses and concentrate on their operations without the burden of vehicle maintenance.

• New Vehicle Options

Both financing methods offer the opportunity to drive new vehicles. This can be particularly appealing for businesses that prioritise maintaining a modern and reliable fleet. Newer vehicles often come with improved fuel efficiency and advanced safety features, reducing operating costs and enhancing driver safety.

Differences between BCH and BCP

• Ownership of the Vehicle

One of the key distinctions between BCH and BCP lies in vehicle ownership. With Business Contract Hire, the business never owns the vehicles outright. Instead, they lease the vehicles for the duration of the contract, returning them at the end of the agreement. On the other hand, Business Contract Purchase provides the option to purchase the vehicles at the end of the contract term by making a final “balloon payment,” which represents the predetermined residual value of the vehicle.

• Depreciation Risk

In BCH, the business is shielded from the risk of vehicle depreciation. Since they don’t own the vehicle, they are not directly affected by fluctuations in its value over time. The depreciation risk is transferred to the leasing company. In contrast, BCP exposes the business to the market forces that can impact the vehicle’s residual value. If the actual market value is lower than the agreed residual value, the business may face financial losses upon vehicle disposal.

• End of Contract Options

At the end of the BCH agreement, the business simply returns the leased vehicles, with no further financial obligations. They can then choose to enter into a new contract for updated vehicles or explore alternative options. With BCP, the business has more flexibility and choices. They can either make the final balloon payment and own the vehicle, extend the contract, trade-in the vehicle for a new one, or simply return the vehicle with no further obligations.

• VAT and Tax Implications

VAT treatment and tax implications differ between BCH and BCP. In BCH, businesses can often claim back a portion of the VAT on the monthly payments, making it more tax-efficient. For BCP, VAT is generally paid upfront on the full purchase price, but the business may be able to claim back a percentage based on the vehicle’s business use.

Conclusion

Business Contract Hire (BCH) and Business Contract Purchase (BCP) present compelling options for businesses looking to acquire vehicles without committing large capital outlays. While both financing methods offer fixed monthly payments and tailored solutions for businesses, their key differences lie in vehicle ownership, depreciation risk, end-of-contract options, and VAT/tax implications.

At Compass Vehicle Services we offer BCH as we feel this offers many advantages to our customers over BCP:

1. Lower Financial Risk.
2. No Residual Value Concerns.
3. Flexible End-of-Contract Options.
4. Improved Cash Flow Management.
5. Tax Efficiency.
6. Access to New Vehicles:

Overall, Business Contract Hire offers businesses a hassle-free, cost-effective, and flexible way to acquire and manage a fleet of vehicles, making it an appealing choice for many companies.