Company Vehicles: Lease or Buy?
Company vehicles can be a major expense for your business. Can leasing reduce those costs, or is buying going to benefit your bottom line better? While there is no one right answer for every company, you can make the lease or buy decision easier by asking the right questions up front. While it might be an easy decision for some companies, managing a service fleet can be different. It’s important to consider the factors that are most important to service contractors.
The Pros of Leasing
Let’s start with the good news: leasing is often cheaper overall if you keep a vehicle less than three years. You don’t need to put down large down payments, or incur large monthly payments. Also, if the vehicle is used for business at least 50% of the time, you are eligible to receive tax benefits. Lease payments are deductible, but check with your accountant as to the specifics for your specific situation.
Impress Your Customers
One of the advantages of leasing is impressing customers with your professionalism. Having a nice, new, “shiny” vehicle can give you a great first impression when you arrive on site. And wraps or magnetic signs can be essential to marketing your business. Commercial vehicle leasing contracts do account for this industry standard, but make sure you read your individual contract first. With leased vehicles, you can afford to replace both the advertising and the vehicles themselves more often. Your business sends a fresher, vibrant message about how professional you are. For service contractors, it’s a key reason to consider leasing, and to find a leasing company that understands your business.
Finally, at the end of the lease, you don’t have to worry about what to do with the vehicle. As the maintenance costs start to rise – and eat into your cash flow – you can move on to another vehicle. If you’ve chosen a wrap or magnetic sign, you can update them before they fade or look dated. Need to move from a pickup to a van, or from a car to a truck? With leasing, you have the ability to get the vehicle you need much more easily. There’s no concern about the cost of selling the vehicle, or whether you’ll come out ahead. All of that is planned up front in the lease.
The Cons of Leasing
Taxes and Depreciation
As great as these points are, there are a few downsides to consider. You can’t deduct the depreciation value, if you lease instead of buy. For some companies, this tax deduction is more valuable than the advertising advantages of leasing newer vehicles. However, the deduction decreases over time, as the value of the vehicle decreases. What makes sense in one tax year, may not be as strong an argument against leasing in another.
While you don’t have the hassle of managing an older vehicle, you also don’t get to keep it. At the end of the term, you’ll have to find another way to get a vehicle for your business. You either lease another, buy another, or buy the one that you’ve already been leasing. If you typically keep a vehicle on the road for as long as it’s operational – for ten years or more – then a lease doesn’t necessarily turn out cheaper. The cost is dependent on maintenance, which can’t be predicted ahead of time. If you have no intention of ever reselling it, then the resale value isn’t a worry, either.
However, big worries for leasing, especially for commercial use, are mileage overages and wear and tear. Many leasing contracts are written with mileage limitations of 12,000 to 15,000 per year. For service contractors, that alone is a huge limitation. Mileage overage fees could easily eat into whatever cash flow savings you saw during the lease term. Their idea of “excessive wear and tear” might just be your idea of a job well done. Think of every time your employee tosses equipment in the back of your vehicle, or gets a ding or a dent on the job site. Getting a job done quickly and efficiently on site can often result in being hard on the vehicles that got them there. A contract in your favor can lessen these worries, but they are definite downsides to consider.
Limitations on Advertising
Finally, not all lease agreements allow vehicle wraps; and some restrict any kind of customization at all. Magnets can easily damage the paint surface, especially if they are left on for long periods of time. Water can get trapped behind the magnet and over the paint, along with small particles of dust and dirt. You won’t know the damage is there until you remove your magnet – often too late to fix it. Then the only option is repainting a vehicle you’re about to return at the end of the lease. Lower quality wraps can also damage the paint, due to inferior adhesives. These unpleasant surprises can end in even more unpleasant fees at the end of your lease.
When considering a leased vehicle for your business, no one factor should make the decision for you. Each business will have unique needs, especially service contractors. With the right understanding of what your needs and concerns are, you can make the right choice for your contracting business.