Ideal for: Businesses that run high value vehicles and want to avoid the risk of their fleets depreciating
Business Contract Purchase, or BCP, is the
PCP
equivalent for businesses. Like PCP the value of the car at the end of the contract is calculated at the start of the agreement and this value is deferred. This deferred sum is usually referred to as the Guaranteed Minimum Future Value (GMFV) and is based on a number of factors including how old the car will be at the end of the agreement and how many miles it is expected to have covered. The future value of the car is guaranteed by the lender so will not fluctuate. Deferring the GMFV to the end of the agreement in this way means that the business’s regular monthly payments are lower than those on a comparable HP agreement over the same term.
VAT implications
As BCP is a purchase agreement which means there is no VAT charged on the monthly payments, unlike the rentals paid under a Finance Lease
or
Contract Hire. But VAT is payable for add-on packages such as service or maintenance agreements. A BCP agreement also gives businesses the flexibility to decide whether you would like to own the car outright at the end of the agreement by paying the deferred value (GMFV), or returning the car to the lender and entering into a new car finance agreement.
At the Beginning of the Agreement
Under a BCP agreement, you agree with the dealer or broker the amount you want to borrow, less any deposit payment and the value of any car you are part-exchanging. Your finance application is then submitted to motor finance companies and, provided you pass their credit checks, the lender pays for the car on your behalf. During the agreement, the business will pay for the full price of the car plus interest, minus the guaranteed future value of the car. This means that the monthly payments are usually less than they would be under a comparable HP agreement over the same term.
At the end of the agreement
The business will have three options:
- Pay the guaranteed future value in full and own the car outright. The final payment can also be refinanced subject to additional checks.
- Hand back the keys and walk away
- Trade the car in by using any existing equity (if the guaranteed future value is actually lower than the current market value of the car) as a deposit for a new finance agreement.
If the car is to be handed back but mileage has exceeded the forecast mileage agreed at the start of the contract, the business will need to pay an excess charge.
You can partially or fully settle a BCP agreement at any time, but should check the terms and conditions of the agreement as each finance company has its own procedures on how to do this.
Advantages of Business Contract Purchase
- Lower monthly payments than Hire Purchase for a comparable car and term.
- A low deposit at the start of the agreement.
- Flexibility at the end of the agreement on what you would like to do with the car.
- Fixed monthly payments throughout the term of the agreement.
Things to remember
- BCPs could work out more expensive overall than a Hire Purchase agreement for an equivalent car, especially if the business decides to enter into a second finance agreement to pay the deferred future value of the car at the end of the initial agreement.
- Most business finance agreements are ‘unregulated’ which means the same protections are not available for businesses as they are for consumers.
- Businesses should be careful about how they estimate their annual mileage as they’ll be charged for each additional mile over and above their allowance.
- When the car is returned it has to be in good condition as any damage over and above ‘fair wear and tear’ will be chargeable.
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