Choosing the right leasing option for your company's fleet impacts your bottom line and operational efficiency. Closed-end leasing is a popular choice for many businesses because of its simplicity and convenience.
However, before getting into a closed-end lease agreement, you should assess whether it aligns with your company's unique needs and business goals.
Dig in as we explain why closed-end leasing may not be ideal for your business.
It Carries Numerous Restrictions
A closed-end lease will typically specify the maximum mileage allowance for the lease term per year. If you exceed this limit, the leasing company imposes an excess mileage fee for each additional mile driven over the limit. Since these charges can add up quickly, the mileage limitation may affect your market coverage.
It may restrict your ability to serve clients beyond your current market or expand into new markets requiring extensive travel. That may dull your competitive edge or restrict your operation to a small, highly competitive market. Gradually, the competition may lower your business revenue and erode your profits.
Worse still, a closed-end lease imposes limits on vehicle customization or modifications. That may affect your ability to modify your vehicle to meet specific market needs or take advantage of a particular branding style.
It Restricts Your Ability to Restructure the Business
Closed-end leases often impose strict penalties for early termination. These fees can be substantial as they may include the remaining lease payment, depreciation costs, and other charges. The cumulative effect of these fees may make lease termination financially burdensome for your company.
The high cost of these fees may hinder your ability to adjust your fleet size quickly in response to changing market dynamics. It hampers your ability to restructure your business operations to accommodate demand fluctuations or new market conditions. That amounts to a double tragedy as you may be operating at a loss while still on the hook for the monthly lease payments.
Conversely, paying the hefty fees to break a lease may leave your business cash-strapped. It may impact your cash flow and ability to allocate resources to critical areas of your business.
You Don't Own the Vehicles
The monthly lease payments, which cover depreciation, taxes, interest, and fees, can prove expensive over the long term. Over the years, they can add up and become more costly than purchasing or financing the vehicles outright.
Unlike vehicle financing, the monthly payments don't count toward vehicle purchases. At the end of the lease, you don't own the car. Your business may spend a small fortune on cars without building assets. The lack of tangible business assets may ding your credit worthiness and affect your ability to secure business financing.
You're Not Rewarded for Your Efforts
The lessor will not recognize nor reward you for the effort to keep the car in excellent running order. They will, however, severely punish you for damage or wear and tear that exceeds the expected depreciation rate.
For instance, you may lease a $20,000 cargo van with a $10,000 depreciation. If the vehicle only depreciates by $6,000, the lessor can sell it for $14,000, but you're not entitled to any or part of the profits.
Get the Best Lease Option for Your Business
Leasing is an excellent way to expand your fleet without incurring huge upfront costs. However, you must choose a lease option that aligns with your business goals and objectives. Ideally, leasing a vehicle should complement your business operations, not hinder them.
At Wilmar Inc, we provide world-class vehicle leasing services. You can count on our five decades of service to help you make the right choice. Contact us today, and we'll help you pick the best lease option to help you grow your operations and build a successful business.
