My business

Car loan or car lease for your business?

You can finance a car or van for your business with a loan. But you can also lease the vehicle. What are the differences and points for attention?

Companies and the self-employed register hundreds of thousands of new vehicles in Belgium each year. A large number of them are leased or financed with a loan.

There is no right or wrong way to finance a car or van for your business. Do you want the vehicle to (later) become your company’s property? Will you drive the vehicle, or an employee? Depending on your preferences and expectations, one formula will suit you more than the other. This is also true on the accounting front. Here we set out the differences so that you can make the best choice for your business.

A car loan for your business

If you want to finance a car, van or lorry for your business, an instalment loan is the first option. You receive the money you need in one go, and make fixed repayments, e.g. monthly, every six months or annually.

How long does the loan run for? This depends on the amount you borrow, how easily you can repay the loan and the vehicle itself. In some cases, it may be 1 or 2 years, but it may even be up to 8 years. You can deduct the administration fees and interest as professional expenses.

However, bear in mind that you can only take out a loan for the vehicle, and not for the VAT that you pay on the vehicle. You can recover a large amount of the VAT via your VAT return, but you will have to pre-finance it. For this reason, a lease may appeal more to business starters because you pay this VAT back in instalments.

If you buy a car with a loan, then as an entrepreneur you automatically become the owner. This also means that you are responsible for administration, maintenance and insurance, etc. If your company buys a car, this is an investment you have to write down on an annual basis. The depreciation period is determined by its normal useful life: this is usually 5 years.

You can recover a large amount of the VAT via your VAT return, but you will have to pre-finance it.

You can also make a company car available to any employees you may have. It does not matter whether you finance the car(s) with a loan or lease. It is more advantageous for you as an employer to provide your employee with a company car than to grant him or her an equivalent salary increase. The employee signs a contract for the use of the company car (car policy). If you provide a company car, the employee receives a taxable benefit in kind.

Financial lease for your business

If you opt for a lease, you will pay a periodic amount to use the car, e.g. every month. The leasing company will buy the car and also pay the full VAT at the start. You may use the car for an agreed period (e.g. four years). After that, you have various options:

  •  The contract ends and you return the car. You can then, for example, enter into a new lease for another car or take out a loan for another car.
  • You buy the car at the end of the contract. The residual value is laid down in the contract beforehand.
  • You extend the contract and lease the car for a further period (only available if the purchase option at the end of the contract does not exceed 15% of the investment amount).

A financial lease therefore offers flexibility that you do not have with a car loan. While you have to contribute some of your own resources with a loan, you still have those funds at your disposal with a financial lease.

As with the purchase of a vehicle, with a lease you can freely choose the make, model and trim of the car. If you want to wrap the vehicle, add features or alter it, you can. Since you are not buying the vehicle yourself (the leasing company is), you are not the owner of the car. However, with a financial lease, you are still responsible for maintenance and for matters such as registration tax, annual road tax and motor insurance.

Choosing a financial lease is also an accounting matter. If the purchase option at the end of the contract does not exceed 15% of the investment amount, this is referred to as an on-balance lease. The bills you pay are capital repayments with interest. The depreciation and interest offer a tax advantage. The depreciation rate depends on the normal useful life of the vehicle and not on the length of the contract. Since you are writing down the vehicle, your debt ratio increases.

If the purchase option is more than 15%, this is referred to as an off-balance lease. The vehicle does not appear on the company’s balance sheet, but it is recorded on the statement of profit and loss. The bills count as costs, which are tax deductible.

Off-balance or on-balance? You should also ask your accountant for advice on this choice.

A financial lease therefore offers flexibility that you do not have with a car loan.

New car for your company?

Find out how to finance it with: