Company vehicles are non-current or long-term assets. Therefore, it’s best to consider whether leasing or buying would do you better in the long term.
But before you consider either option, you should factor in the extra costs. For starters, your vehicles may need FMCSA registration and an insurance policy. You can read about why this is crucial a little down the road.
Now, let’s get into the major decision.
Buy Or Lease A Vehicle For Your Business?
If you’ve heard some competitors or friends who own businesses talk about what they did, you should forget all of that immediately. Just because leasing or buying was the best option for another company doesn’t mean it is for yours as well.
To make this critical decision, you first need to consider three important things. After this, the right choice for your company may become more transparent. These are:
Whether you’re leasing or buying through a loan, you need to think about how much money you can put as a down payment.
Here, a significant thing to consider is the additional expenses. Early on, you read about registration and insurance. But that are only two things. You may also want to think of add ons you may need to make the vehicle more to your liking, parking space, maintenance, and first monthly payment, among other things.
With all that in mind, calculate an amount that you can put towards the down payment. You should be able to determine whether or not you can afford the monthly installments of buying or leasing a vehicle.
Typically, you don’t need to put as much money towards the down payment for leasing. With buying, you should put as much money as you can into the down payment to reduce the monthly payments.
Like yourself, the company you lease a vehicle from is also trying to make money. Considering that you will be either returning or buying a used vehicle at the end of your lease period, the seller needs to protect themselves from extra expenses.
Therefore, a lease usually has a set number of miles that you can rack up on the vehicle per year. The number usually is around 10,000 to 15,000 miles per year.
For instance, if you lease a vehicle for five years and have an allowance of 12,500 per year, the vehicle should not have more than 62,500 at the end of 5 years.
This is important because they generally charge a good rate per mile that you go above. If you think leasing would be cheaper and you want to use the vehicle a lot, think again.
Unlike buying, you don’t get total freedom when you lease a vehicle. Technically speaking, a lease is more like renting a brand new for a certain period for a good price. That is why the leasing company can dictate how your business uses the vehicle.
For instance, the leasing company can tell you that you’re not allowed to take the vehicle in some areas. If your business doesn’t service those parts, you might be fine. Otherwise, you will need to go in another direction.
Another example is the leasing company can restrict what you do with the vehicle. That means you may not be able to carry out your business functions or activities with the vehicle.
If you think this won’t matter once you have the vehicle, you may feel differently once you’re charged heavily at the end of your lease.
To Sum It Up
With leasing a vehicle, you can get lower monthly payments. You may not even have to put down much money initially. However, you will have to play by the leasing company’s rules and don’t have the freedom to do many things with the vehicle.
When you purchase, you may have to make more significant monthly and down payments in comparison. However, you have the freedom to use and drive the vehicle in the way you see fit.
No matter the option you choose, you can get a tax advantage. That means the cost of a vehicle is depreciable. Also, some vehicles can get tax breaks.