You just launched your new startup. Congrats! Now, you need reliable transportation to meet clients, pick up supplies, and handle all those errands that come with running a business. But should you lease a car or buy one? With so many options, it's tough to decide what makes the most financial sense for your fledgling company. Stick with us as we break down the pros and cons of leasing versus buying a set of wheels for your business.
We'll look at the costs, tax implications, and what happens when the lease ends. You'll learn insider tips to help determine if leasing is the right choice to keep your business rolling on the road to success.
How Leasing Compares to Buying a Car for Your Business
Lower Upfront Costs
Leasing a vehicle means lower upfront costs since you're only paying for the depreciation of the vehicle during the lease term, not the entire purchase price. Your down payment and monthly payments will typically be lower than if you buy. This frees up capital that you can use for other business expenses.
Predictable Payments
With a lease, you'll have a fixed monthly payment for the duration of the contract. This can make budgeting easier since you know exactly what your vehicle costs will be. If you buy a vehicle, your costs are less predictable - things like fluctuating gas prices and maintenance costs can impact your budget.
Newer Vehicles
Leasing allows you to get into a new vehicle every few years. This means you can take advantage of the latest technologies and safety features to keep your employees safe and productive. You'll also likely face lower repair and maintenance costs since the vehicle is under the original factory warranty for most or all of the lease.
Tax Benefits
The monthly lease payments may be deductible as a business expense, allowing you to save on taxes. You can deduct the entire lease payment, not just the depreciation portion. At the end of the lease, you return the vehicle, so there's no remaining asset to depreciate.
Less Responsibility
With a lease, the leasing company retains ownership and responsibility for the residual value of the vehicle. You just return the vehicle at the end of the lease and walk away. If you buy, you'll be responsible for selling or trading in the vehicle yourself. This also means the risk of the vehicle depreciating faster than expected falls on the leasing company, not you.
Of course, leasing isn't for every business. You'll need to weigh all the pros and cons based on your own situation. But for many, leasing can be an attractive alternative to buying.
The Pros of Leasing a Car for Your Company
Leasing a vehicle for your business has some significant advantages over buying.
Lower Upfront Costs.
When you lease, you only pay for the depreciation of the vehicle during your lease term rather than the full purchase price. This typically amounts to just a few thousand dollars upfront to get into a new car. Compared to the hefty down payment required to buy a vehicle, leasing can free up your working capital.
Predictable Payments.
Lease payments are fixed for the duration of your lease, so you know exactly how much it will cost each month. This stability can make budgeting easier. Lease terms typically range from 24 to 60 months. Once the term is up, you simply return the car and lease another.
Flexible Terms.
Lease terms can often be tailored to your needs. If you want to keep payments lower, choose a longer lease term. For the latest vehicles more often, opt for a shorter lease. You can also build in options like maintenance plans to avoid surprise repair costs.
Always Under Warranty.
Since you're leasing a new vehicle, it will typically come with the manufacturer's full original factory warranty. That means you're covered for any unexpected repair costs during your lease. Once the lease ends, any potential reliability or maintenance issues become the next lessee's problem.
Tax Benefits.
Lease payments may be tax deductible as a business expense. Check with your accountant for details based on your business and location. The total cost of leasing and maintaining a vehicle for business use may provide substantial tax write-offs.
Newer, Safer Vehicles.
By leasing, you'll always have access to the latest vehicle models with the most advanced safety features and technology. This can benefit your business in terms of safety, productivity, and image. If technology or image is important in your industry, leasing helps ensure you make a good impression.
The Cons of Leasing a Vehicle for Your Business
Higher Long-Term Costs
While lease payments are often lower than loan payments in the short term, leasing a vehicle for your business usually costs more in the long run. At the end of a lease, you have no equity in the vehicle. If you want to continue using it, you have to pay the purchase price to buy it or lease another new vehicle. Over several lease cycles, these recurring costs can really add up.
Mileage Restrictions
Leases typically limit the number of miles you can drive each year, often around 12,000 to 15,000 miles annually. If you go over the limit, you’ll pay hefty overage fees, usually 15 to 25 cents per mile. Leasing may not make financial sense for high-mileage businesses due to these restrictions and penalties. It’s best for businesses that drive a predictable, limited number of miles each year.
Vehicle Condition Requirements
When a lease ends, you’re required to return the vehicle in good working condition. This means fixing any dents, dings, scratches, or other damage beyond normal wear and tear. The leasing company will assess fees for any needed repairs or reconditioning to bring the vehicle up to the condition outlined in your lease agreement. This can lead to surprise fees at the end of the lease that eat into any cost savings.
Less Flexibility
Once you sign a lease agreement, you’re typically locked in for the full term, usually 24 to 48 months. If your business needs to change, it may be difficult to get out of the lease early or adjust the agreement. Leasing also limits your ability to modify or upgrade the vehicle during the lease period. For businesses where needs fluctuate or change quickly, leasing may lack the flexibility that vehicle ownership provides.
While leasing seems attractive with its lower upfront costs and newer vehicles every few years, the long-term financial implications and lack of flexibility often make purchasing a smarter choice for many businesses. Consider your needs and how long you plan to keep the vehicle before deciding between leasing versus buying.
Questions to Ask Yourself Before Deciding to Lease
Leasing a vehicle for your business is a big decision. Before you sign on the dotted line, ask yourself these critical questions to determine if leasing is the right choice.
Do you want to upgrade often?
If you like driving the latest models and technology, leasing may be for you. Lease terms typically run for 2 to 3 years, allowing you to upgrade frequently to the newest vehicles. At the end of the lease, turn in the car and lease another new one.
Is your business tax situation advantageous?
The tax benefits of leasing a vehicle for business use can be significant. The lease payments may be tax deductible as a business expense. You can also deduct sales tax and interest paid. If tax deductions are important for your business, leasing deserves a close look.
Do you drive a lot of miles?
If your business requires you to drive high mileage, leasing may not pencil out. Lease contracts typically limit the total miles allowed over the term of the lease. Exceeding the limit results in hefty penalty fees when you turn the vehicle back in. Make sure any lease you consider has a mileage limit that fits your needs.
Do you want flexibility?
Leasing provides more flexibility than purchasing a vehicle outright. Your business isn't locked into a vehicle that may not meet your needs down the road. At the end of the lease, you simply return the car and walk away. If your business needs change, leasing allows you to switch vehicles to suit your current requirements.
Can you afford the payments?
While leasing a vehicle typically requires lower down payments and monthly payments than purchasing, you must ensure the payments fit your budget. Review the total cost of the lease, including down payment, monthly payments, and any additional fees, to determine if leasing is affordable for your business.
Leasing a vehicle for your company is a big decision that has many factors to weigh. By asking yourself these key questions, you can determine if leasing might be the right choice to meet your business needs. If the answers point to leasing, you’ll know it’s worth exploring further with a trusted auto financing company.
Conclusion
So there you have it! Leasing a car for your business has its pros and cons. Weigh your options carefully based on your specific needs. Running the numbers will give you the full financial picture. But don’t forget the intangibles too - like that new car smell. At the end of the day, choose what makes the most sense for your bottom line and business goals.
Leasing works for some companies but not others. Do your homework so you can make an informed decision. And don’t stress - you’ve got this! Making smart choices about company cars is just another part of being an awesome entrepreneur. Contact us here at Wilmar for a complimentary lease analysis for your company.
