To Buy or To Lease? Identifying The Best Financing Options For Your Fleet Acquisition
Maybe your company is growing and you need to expand your fleet. Maybe your vehicles are costing you too much in repair costs and need to be replaced. Well, what do you do?
You could go to your bank and use your line of credit or dip into your capital reserves. Or maybe, you could just use someone else’s capital and preserve your own for growth activities.
Bypass a dealership and choose to lease through an expert fleet management company who understands the difference between fleet leasing and consumer leasing. Not only does leasing preserve your capital, but it provides savings through tax benefits, and it improves your cash flow. In many cases, fleet leasing is the most financially sound option and provides the most benefits.
Keep in mind, fleet leasing is not the same as consumer leasing.
Consumer leasing can be punitive and it is not flexible.
Fleet leasing is much more flexible and can work for most business scenarios.
Leasing works in these situations:
- The vehicle is a car, truck, SUV or commercial vehicle.
- Your goal is lower payments.
- You are a consumer or company with decent credit
- You drive a lot of miles on vehicles. Leases can be written for over 50,000 miles/year.
- You don’t know how long you will keep the vehicle.
- You need to customize, upfit, or wrap the vehicle.
- You use the vehicle personally, for business, or any combination.
- Your goal is to save sales tax.
- Your goal is to maximize income tax benefits (business or business use)
Leasing is a slam-dunk if:
- Your business use is over 50%
- The vehicle costs over $16,500
Running the Numbers
The lease versus buy decision starts with a cost analysis but should look beyond just cost. The two key factors in a leases-versus-buy analysis are cash and tax; Cash meaning what you spend in capital for each option, and tax meaning what income tax and sales tax benefits come with each option.
In most cases, the cash analysis of the two situations will be within several hundred dollars of each other. Leasing generally becomes advantageous once you take the income and sales taxes into consideration, but this can vary depending on vehicle type and relevant tax treatment.
In 43 states, sales tax is only paid on the portion of the vehicle that is used. The residual value is not taxed resulting in a significant sales tax savings. For example, if there’s an $80,000 truck with a $30,000 residual value, your firm saves sales tax on $30,000. It’s only paid when and if you decide to extend or buy out the lease.
There are a few things to note. First, operating leases are expensed 100% as incurred and purchases are capitalized and depreciated for tax purposes. Depreciation can be limited due to “luxury auto limits” per IRS publication 463. Bonus depreciation and section 179 rules change annually, and, in many cases, are determined late in the year and apply retroactively, making it difficult to plan. Lastly, operating leases for business vehicles are usually 100% expensed.
Tax rules are complex and ever-changing, but they’re a necessary part of your analysis. It’s best to consult your tax advisor to determine which rules apply to you; be sure they know the type of lease you are looking at so they can provide you with the best advice.
You only pay for what you use though leasing, not the entire purchase price. Because of this, payments are notably lower and the amount of cash tied up in a vehicle is greatly reduced. When buying a vehicle and financing it with a loan, you finance 100% of the cost, your monthly payments are higher and build equity over time. The more you pay, the more equity you build. Proceed with caution when financing, though, as financing contracts are often 60-84 months long. Amortizing vehicles that depreciate quickly over a long time is dangerous and you will be upside down in the vehicle. The intent of an extended payment term may be to lower payments, but there can be consequences when negative equity results and your company is either forced to take a large cash loss to sell each vehicle, or you try to keep vehicles longer than you normally would. This drives up maintenance costs and increases downtime.
When analyzing monthly payments, there are a few factors to consider. Sales tax is paid up-front on vehicle cost when you purchase, but it is pay-as-you-go with lease payments. Moreover, a purchase option at the end of a lease lowers your monthly payment; the intent is lower payments, not higher equity. This is how you can operate more leased vehicles for the same cost as a few financed vehicles. Always compare identical finance and lease terms when comparing payments.
What Type of Lease is Best for Me?
If you want to lease, you have two choices: an open-end lease and a closed-end lease. An open-end lease is a true fleet lease; it does not have mileage or damage charges and is naturally flexible. The residual value is estimated at the beginning of the lease, and it takes anticipated mileage and “wear and tear” into account.
At the end of the lease, you are responsible for the vehicle’s value. If its value at the end is higher than the original estimate, the equity built up is either paid out to you or used as a trade-in value on a subsequent lease. If the value is less than the estimate—as when there is unexpectedly high mileage or damage—you will be billed the difference.
A closed-end lease is a guaranteed fixed cost over a predetermined term. You are responsible for maintaining a mileage limit; excess mileage or wear and tear will be billed. At the beginning of the agreement, you should decide on your terms, making sure you choose a lease term that matches your vehicle usage and cash flow needs. Your lease can always be extended, but cutting a closed-end lease early will cost you.
The Benefits of Leasing
Leasing provides you with several advantages. As discussed above, leasing preserves capital and lowers the monthly payments. This allows you to turn vehicles more frequently and run your operations using newer vehicles. Operating with newer vehicles will reduce repair and maintenance costs as well as fuel costs. Newer vehicles are equipped with the newest safety features and technology. Further, lease agreements are often three to five years, making it simple for you to replace your fleet vehicles often. You will have less administrative tasks to manage since all of the work to spec, acquire, upfit, and finance the vehicles is completed by the leasing company. Fleet management companies (FMC) offer the full range of fleet solutions.
Sources of Fleet Financing
Consider a FMC whose main service offering is fleet leasing. FMCs who focus on leasing have the expertise and they provide a variety of fleet solutions, like fleet maintenance management, fuel management, telematics, fleet analysis, fleet rebalancing and more.
You may think only companies with large fleets can benefit from hiring a fleet management company. The truth is, many small fleets choose to lease through FMC’s. While it is also true that the number of companies using FMC’s increases dramatically as company and fleet size increase, fleet services and fleet solutions have proven beneficial to a range of businesses large and small.
Every company deserves FMC experts with your best interests at heart. FMCs have proven strategies to preserve your fleet’s value, maximize resale profits, drive significant savings, improve risk management and more.
Doering Fleet Management can turn the stress of running a fleet into a clear, organized process and guide you towards better, more informed decisions for your fleet. Whether you’re searching for vehicle financing, comprehensive fleet management, maintenance management, or a combination of services, Doering Fleet Management has the fleet solutions to meet your needs, exceed your expectations, and offer affordable solutions for fleets of all sizes across the United States and Canadian Provinces.