Don’t buy. Take the opportunity to get a new business car with a low cost contract hire rental instead. And keep your credit lines open. Editor Ralph Morton explains.Perhaps you’ve never thought about leasing a car before. Possibly on your accountant’s advice, you feel more comfortable purchasing and owning a car.

But credit is so tight at the moment that getting extra funding is difficult. John Wright, national chairman of the Federation of Small Businesses (FSB) has summed it up like this.

“While there have been efforts to restore lending to small businesses and some enterprises are being granted finance, the FSB is still hearing negative reports about banks holding back funds from viable small businesses.”

But rather than tie up your overdraft and bank loan credit lines with funding for cars, why not lease them? The beauty about leasing – whether on contract hire (CH), personal contract hire (PCH) or personal contract purchase (PCP) – is you have access to an additional credit line. And the cost isn’t prohibitive.

In fact, you can lease more expensive cars for the same price as cheaper cars. That’s because some cars have better residual values – the amount they are worth at the end of the contract – and that is factored into the lease cost.

As Robert Wastell, managing director of CompareContractHire.com, explains: “A more expensive car may actually have a lower monthly contract hire rental than a cheaper vehicle. This is due to the future forecasted re-sale value that the finance company predicts. Therefore you can drive a better car than you think you can afford.”

Here’s what I mean. The Ford Focus 1.8 Zetec 5dr costs L16,845. The Ford Focus 1.8 TDCi Zetec S 5dr costs L18,645: a difference of L1800. Yet, on a monthly contract hire basis, the more expensive car to buy is actually cheaper on rentals. This table explains it:

Ford Focus 1.8 Zetec 5dr v Ford Focus 1.8 TDCi Zetec S 5dr

Cost new L16,845 v L18,645
Difference L1800
Monthly rental L253.29 v L252.55
Difference L0.74
Source TCH Leasing, 36 months/10,000 miles a year contract hire, from CompareContractHire.com

If you were to take a L20,000 loan out to buy the car over the same period it would cost L745 a month (source Alliance & Leicester). Granted you end up owning the car at the end of the loan period. But when you want to minimise costs, contract hire is a very effective and low-cost method of acquiring a new car for business.

If you don’t want to run the car through your business, then simply add VAT to the above rentals for a PCH price. Any business use can then be re-charged to your company using the AMAP (Approved Mileage Allowance Payment) scheme of 40p per mile.

Here’s another example on two executive business saloons.

Lexus IS 220d SE-I 4dr v Mercedes-Benz E220 CDI BlueEFFICIENCY SE auto

Cost new L24,809 v L28,099
Difference L3290
Monthly rental L404.70 v L404.74
Difference L0.04
Source Days Contract Hire, 36 months/10,000 miles a year contract hire, from CompareContractHire.com

To buy these cars with a L25,000 loan from Virgin Money (the largest amount on offer) would cost you L432.67 a month over six years – double the period, and still at a higher monthly cost.

So, if you haven’t considered contract hire or personal contract hire before, now is the time to reconsider your business car financing.

Further information

For more on contract hire read What is contract hire?

For more on personal leasing read What is a personal lease?