Business contract purchase: what the balloon payment costs you

A business contract purchase lets your limited company buy a vehicle in instalments, while leaving a large slice of its value until the end. You pay a deposit, then fixed monthly payments, then a final lump sum – usually called the balloon. You can pay the balloon and keep the vehicle, or decline it and hand the vehicle back. Almost everything that makes the agreement good or bad for you follows from how big that balloon is, and most quotes won't make that obvious until it lands.

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What a business contract purchase is

A business contract purchase is a purchase agreement, not a rental. The finance company owns the vehicle during the term, your company has the use of it, and at the end your company decides whether to buy it with the balloon payment or hand it back. You'll also see it sold as BCP, business PCP, or lease purchase.

What the funder is really selling you is one number. When it quotes the agreement it sets a guaranteed minimum future value: what it promises the vehicle will be worth at the end of the term. That figure becomes your balloon payment. And because the funder has guaranteed it, handing the vehicle back is a real option rather than a courtesy – if the vehicle is worth less by then, the shortfall is the funder's to carry, not yours.

That one feature separates a business contract purchase from the agreements nearest to it, which are what most directors are really choosing between. With hire purchase with a balloon payment the final payment is compulsory and nothing is guaranteed, so if the vehicle has dropped below it your company still owes the full amount. Ordinary hire purchase has no balloon at all, which is how hire purchase works in its usual form. Contract hire, the shape behind business car leasing, has no final payment and no route to ownership.

We don't offer a business contract purchase or a PCP at iwoca. Almost every other page on the subject is published by a leasing company, a dealer, or a credit broker, so nothing here depends on which way you go.

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What the balloon payment changes

Your monthly payments cover the gap between the price and the balloon, plus interest on everything financed – including the part you've deferred. So deferring more doesn't make the vehicle cheaper. It moves money out of 48 small payments into one large one, and that one carries interest for the whole term.

Take a £28,000 van with a £2,800 deposit over 48 months, at an illustrative 9% a year. Guarantee the future value at 25% of the price, or £7,000, and the monthly payment is about £505. Guarantee 40% instead, or £11,200, and it drops to about £432 – so £73 a month less, for £4,200 more to find at the end. Those are illustrative figures rather than a quote, and your funder's rate and fees will differ.

The mileage you agree at the start pulls the same lever. Agree a high annual mileage and the funder expects the vehicle to be worth less by the end, so the guarantee falls and the monthly payment rises.

This is also the honest reason a business contract purchase suits an electric vehicle. Second-hand prices for electric cars and vans are still settling, so a guarantee of what yours will be worth in four years is worth more than the same guarantee on a diesel. You are buying somebody else's view of a number nobody can predict yet.

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Your choices when the balloon falls due

Three things can happen on the date the balloon is due, and your company picks. Pay it, and the vehicle is yours. Hand the vehicle back, and the agreement ends there. Or part-exchange it: the funder sells the vehicle, settles the balloon out of the proceeds, and anything left over is yours, either as cash or as the deposit on the next one.

That third option is where the guarantee quietly pays off: if the vehicle has held its value better than the funder expected, the surplus belongs to your company.

Two charges only bite if you do hand the vehicle back: excess mileage, where you've driven more than the agreement allowed, and fair wear and tear, where the vehicle comes back below the condition standard the agreement sets. Pay the balloon and neither applies, because by then the vehicle is yours. Both rates vary from one agreement to the next, so check the pence-per-mile figure and the condition standard before you sign.

If the balloon looks too large to pay in one go, raise it early. It can't be split under the original agreement, but your funder may be able to refinance it into a new one with monthly payments. Ask for that figure, and the total cost of each route, before the date arrives.

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The monthly payments carry no VAT

This is the detail the market most often gets wrong, so here it is flat: the monthly payments on a business contract purchase carry no VAT. The agreement is a purchase, not a rental, so there are no rentals for VAT to sit on.

HMRC's test is where the optional final payment sits against the vehicle's expected market value. Set below that value, which is how a business contract purchase is built, it is 'a supply of goods, with a separate supply of finance', and VAT is due on the whole of the charge for the goods at the outset of the contract (VAT time of supply manual, VATTOS9250), with the finance charge itself exempt where the agreement shows it separately. A service or maintenance package is the exception: that is a supply of services, so VAT is charged on it.

Getting the VAT on the vehicle back is a different question, and for a car the answer is usually no. 'As a general rule, you cannot recover the VAT on the purchase' (VAT Notice 700/64, section 3.1). The exceptions are narrow: a car used exclusively for your business and not available for anyone's private use, or one intended mainly as a taxi, a driving instruction car, or self-drive hire. A car a director can take home at the weekend fails the first test, which rules out most company cars. Vans follow the ordinary rules, so it's worth checking how to reclaim the VAT on one.

Leasing puts you somewhere else entirely: lease a qualifying car and you cannot normally recover 50% of the VAT on the rentals, as a proxy for private use (section 4.2 of the same notice). So the choice between this and leasing a van changes which VAT rules apply, not just the monthly figure.

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Capital allowances, and your balance sheet

Because a business contract purchase is a purchase, the vehicle goes on your company's balance sheet and the capital allowances sit with your company rather than the funder. For some companies that is the whole reason to choose it. The outstanding debt goes on there too, which raises your reported gearing – worth a look if you have bank covenants.

The same figure is doing the work here as in the VAT answer. HMRC doesn't treat a buyer under a lease purchase contract as the owner unless the agreement would count as a finance lease under normal accounting practice, and 'a contract that contains an option for the lessee to buy the asset for market price at the end would not be treated as a finance lease' (Capital Allowances Manual, CA23310). The balloon is set below expected market value, which is what makes it a purchase on both tests. An agreement that instead lets you buy at open market value gets no plant and machinery allowances until you pay that price, so put your own wording in front of your accountant.

Cars then have narrower rates than most companies expect. A car gets no annual investment allowance and no full expensing at all. A new and unused car at 0g/km gets a 100% first-year allowance if your company buys it before April 2027, which for corporation tax means 31 March 2027, and a second-hand electric car doesn't qualify. The rest is written down by emissions at the main or special rate, and buying a company car outright sets out that arithmetic in full.

Claim a first-year allowance and then hand the vehicle back, and the relief doesn't stay: CA23310 treats your company as ceasing to own the asset, so a disposal value comes back into account that year. The interest sits outside all of this, coming off profits separately as a finance cost.

These rules are as at 14 October 2026, and the Budget on 28 October 2026 could change the rates, the allowance window, or the grants below. Check your own position with your accountant: this is general information, not tax advice.

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Electric and low-emission vehicles

A government grant can still come off the price of a qualifying zero-emission vehicle, which lowers the figure your agreement is calculated on. The seller applies it as a discount: up to £3,750 on a qualifying new car, and up to £5,000 on some large vans (zero emission vehicle grants on GOV.UK). The older Plug-in Car Grant closed to new car orders in 2022, so any quote still citing it is out of date. An electric company car also carries a lower benefit in kind charge for its driver, and that doesn't depend on how the vehicle is financed.

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Ending the agreement early

Your company probably can't hand the vehicle back and walk away part-way through, whatever you've read about the 50% rule.

That rule, voluntary termination, comes from the Consumer Credit Act 1974: once a borrower has paid half the total amount payable, they can end the agreement and hand the goods back. It protects an 'individual', and section 189 defines that as a natural person, a partnership of two or three partners who aren't all bodies corporate, or an unincorporated body. A limited company is none of those, so the right generally doesn't reach your company's agreement. The Finance and Leasing Association makes the same point commercially: most business finance agreements are unregulated, so the protections a consumer gets aren't available to a business.

What your company has instead is whatever the agreement says. Ask the funder for a settlement figure in writing, and ask how it has been worked out, because interest is often front-loaded. Early in the term a settlement figure can come to more than the vehicle would sell for, which leaves your company finding the difference.

If payments are starting to look difficult, talk to the funder before one is missed. It owns the vehicle until the agreement ends, so it can take the vehicle back, and missed payments will show on your company's credit file.

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Business contract purchase or buying the vehicle outright

The comparison most directors want is against simply buying the vehicle, with cash or a business loan, so that it is yours from day one.

Run the same £28,000 van, the same £2,800 deposit, the same 48 months and the same illustrative 9% a year through both, and the only thing changing is whether £11,200 of the price is deferred. Buying it outright costs about £627 a month, £4,901 in interest and £32,901 in total. The business contract purchase costs about £432 a month, £6,755 in interest and £34,755 in total if you pay the balloon and keep the van.

So the contract purchase is about £195 a month cheaper to run and about £1,854 more expensive to own. What the extra buys is the right to walk away if the van is worth less than £11,200 by then, and a smaller commitment in the meantime while the van is out earning. Whether that's worth £1,854 comes down to how confident you are about a second-hand price four years out.

It can also work out dearer than hire purchase over the same vehicle and term, for the same reason, and more so again if you refinance the balloon. Buying outright suits a company that wants to own the vehicle from the start, modify it, or buy it used or privately, which many vehicle finance lenders won't fund.

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The lump sum you knew about four years ago

The balloon is one of the most predictable large payments a small company ever faces: you know the date, and roughly the amount, on the day you sign. Then four years pass and it lands in a month budgeted around a payment a quarter of its size. That makes it a timing question rather than an affordability one. An iwoca Flexi-Loan is a business loan with flexible repayment options, and there's no fee for repaying early, so a company borrowing to keep a van that's still earning can clear the loan as the van's own work pays for it. It won't be the cheapest way to fund a whole vehicle, because a business contract purchase is secured on the vehicle and ours isn't. We lend to UK limited companies, and every new Flexi-Loan needs a personal guarantee from at least one director, who is personally liable if the company can't repay.

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Who it suits, and who offers it

Choosing vehicle finance means balancing cost against flexibility, and both against what you plan to do with the vehicle once the term ends. A business contract purchase trades total cost for the other two.

It tends to suit a company that wants a newer vehicle on a lower monthly payment, has a fair idea of the mileage it will do, and would rather the funder carried the risk of the vehicle losing value faster than expected. It suits you less if your mileage is high or hard to predict, so excess mileage charges are likely, or if you change vehicles every few years and have no interest in owning them, where contract hire is simpler.

Specialist motor and asset finance companies offer a business contract purchase, as do banks and the finance arms of manufacturers and dealers. These are usually unregulated business agreements, so the terms are the terms you sign. Most funders will ask for your company's filed accounts, recent bank statements, and the details of the vehicle, and some will want a director's guarantee if the company is young. Some won't finance a vehicle used as a taxi, for driving instruction or for courier work, so say what the vehicle is for early rather than at the credit stage.