Choosing between buying or leasing fleet vehicles can be complex. Various factors should be considered - some of which may change from one year to the next.
There is no one-size-fits-all answer to this question, which is why the various pros and cons need to be carefully weighed up in relation to your organisation’s needs and financial position.
What are fleet cars and vans?
Fleet cars, vans, and lorries are those that are owned or leased by a company (e.g. a delivery firm) or other entity (e.g. a constabulary).
They are used to carry out their day-to-day activities, and are often integral to the smooth functioning of the entire organisation.
Which option makes financial sense?
Your organisation's financial situation will be a key factor when choosing between leasing or buying vehicles.
And naturally, your financial situation is likely to change over time.
Are fleet vehicles a good buy?
Buying vehicles is likely to be the costliest choice - at least at the beginning. Conversely, the monthly agreements associated with leasing will put far less pressure on your capital position. That said, other factors come into play that can impact costs.
Purchasing a vehicle could be more cost-effective long term, since you can build equity and sell it at a later date. However, buying exposes you to depreciation.
Purchasing vehicles can impact how attractive your business is to investors and lenders
Buying vehicles places assets on your firm's balance sheet, but it can affect your debt-to-equity ratio, in turn reducing how attractive your organisation is to lenders and investors.
Company fleet leasing, meanwhile, is generally considered an off-balance sheet cost. By leasing through monthly payments, capital can be invested into other frontline activities - e.g. human resources, marketing, or other hardware.
Naturally, your company's short, medium, and long-term goals will be a key factor in how capital is spent.
Tax and depreciation costs
The value of any owned fleet vehicles will deflate over time, which can reduce taxable earnings. Conversely, when leasing, the leasing firm enjoys these depreciation advantages.
It's also worth noting that different sorts of leasing agreements offer various financial advantages. Leasing fleet vehicles can deliver tax benefits when lease fees are taken off your firm's income statement. With capital leases, meanwhile, you may be able to deduct interest costs and claim depreciation from lease fees.
Operational requirements
When deciding between leasing and buying, it's critical to examine the perceived service life of a particular asset.
By leasing, you gain access to the very latest vehicles - with the most innovative safety features, and the best fuel economy.
However, there may be more flexibility regarding vehicle replacement when purchasing outright.
If your organisation is likely to require vehicles with different specifications in the short or medium term, this may be easier if you opt for a wholly owned asset.
Mileage and wear-and-tear limits
Some leases come with limits on mileage and wear-and-tear, and some may require the cell to be kept for a certain length of time. breaching a mileage limit attracts fees that can quickly add up. Likewise, there is extra pressure to keep the vehicle in good condition, since returning a vehicle damaged can also mean big fees.
You may also be limited as to what degree - if any - you can upgrade or customise your leased vehicle to suit your specific needs.
If you own a vehicle outright, you wouldn’t be subject to these constraints.
Most leases are open-ended agreements with a minimum term, with options to extend. Closed-ended, fixed-term leases, meanwhile, come with the significant downside of penalties when cancelling early.
However, a given leasing firm may allow you to choose the mileage limit.
Brand image management
What image do your vehicles convey to current or potential customers?
Accessing newer leased vehicles - with all their bells-and whistles navigation, communication and safety systems - may project an image of success. It may also shore up morale, efficiency and productivity among staff, and support the retention (and attraction) of experienced drivers.
Maintenance considerations
Maintenance is a big part of running a fleet. For organisations with small fleets, it can be expensive to invest in tools and equipment - not to mention a workshop where the maintenance will take place.
Additionally, finding qualified technicians can be challenging given the current labour market. In this scenario, it's easier to predict maintenance costs when leasing since the associated warranty covers major repairs and routine maintenance.
Organisations with more expansive fleets will also be affected by the above factors.
Administrative burdens
Alongside eliminating maintenance responsibilities, leasing might also alleviate other time-intensive demands.
The reduced paperwork associated with leasing is a big plus, but it can reduce payroll burdens, too - although this depends on how your company is organised.
Registrations, title management and property taxes are some of the administrative services that can be bundled with leasing contracts. Some may also include medical compliance, licences and training, among other services.
Buying pros
- No mileage limitations
- No fees if returning a damaged vehicle
- Ability to customise the vehicle to suit changing needs
- Increase to business net worth
Buying cons
- You are responsible for all repairs and maintenance
- Increased taxable income
- Ageing vehicles may impact performance, fuel economy and safety
- Cannot change vehicle for newer ones easily (as with leasing)
- May involve property tax or registration fees
- More paperwork
- Value depreciation
- Impact on debt-to-equity ratio, reducing attractiveness to lenders and investors
Leasing pros
- Ability to access newer vehicles more regularly
- Warranty covering repairs and ongoing maintenance
- Can deduct leasing payments as a business expense
- Less paperwork
- More fuel efficient
- Less prone to breakdowns
- No value depreciation worries
Leasing cons
- Mileage limitations
- Fees if returning a damaged vehicle
- May not be able to customise the vehicle
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