Whether you need a fleet of vehicles for your new delivery business or you just want to get a company car for your small business, purchasing is not your only option.
Corporate leasing provides a great way to lower your upfront costs and take away many of the maintenance and repair expenses that come with vehicle ownership. Leasing comes with stipulations, therefore, this article is a brief overview of how corporate leasing works, the industries that commonly use it, and the advantages and disadvantages.
What Is Corporate Leasing and How Does It Work?
Corporate vehicle leasing allows your company to rent one or more vehicles for a predetermined amount and length of time. At the end of the lease, the vehicles are returned and typically exchanged for a newer model. The setup is ideal for companies that do not plan to hold on to vehicles for an extended period of time.
Commercial Lease Options
As you start to look into commercial corporate leasing, you may come across a few different options, including:
- Commercial vehicle line of credit. A line of credit is a great option for companies that are looking to lease a fleet of vehicles at once. One downfall is that you may be limited in the type of vehicle you can choose.
- Capital leasing. These are long-term leases provided for business equipment. Under this lease, the vehicle is considered a business asset. The benefit of this is that you are viewed as the owner, which can translate into a tax deduction. A disadvantage is that this is considered a loan, therefore, the vehicle does depreciate in value.
- Operating lease. This is short-term and is not commonly used for leasing a car, even though it can be. You do not take ownership of the vehicle, but you do have the option to purchase while leasing.
Almost all leases fall under one of two categories: open-ended or closed-ended.
Open-Ended
Open-ended leases are commonly used with commercial vehicles. This type of lease is shorter in length, and there are no mileage restrictions because you, not the lessor, are responsible for the depreciation in value. This also means that you can use the vehicle however you choose.
The structure of payment on an open-ended leasing agreement is based on the depreciation estimate. For example, if you lease a new van that costs $40,000 and your lease is for two years, your payment could be based on an estimated depreciation of $10,000. However, if you return the van, and the depreciation is valued at $13,000, you then owe the $3,000 difference.
Closed-Ended
Closed-ended leasing is more popular for leasing a single vehicle for an individual. The structure of the contract includes a fixed monthly payment and mileage restrictions. The cost of depreciation does not fall on you unless you decide to purchase the vehicle at the end of the lease.
These leases are more long-term, usually three to five years. Getting out of the lease early will likely incur a large penalty, and if you go over the mileage limit, you will have to pay a predetermined amount for each mile over. The rate usually varies between $0.10 and $0.15 depending on the leasing company.
What Industries Use Corporate Leasing?
Businesses across many industries use vehicles as part of everyday operations. Corporate vehicle leasing is a popular option for companies that use a fleet of vehicles. It works much like equipment leasing. Medical facilities that provide passenger vans and retailers that provide delivery commonly use corporate leasing. Moving companies use box trucks and trailers, which are often under lease contracts. Some companies simply opt to provide corporate leases to individual employees.
What Are the Advantages of Corporate Leasing?
If you are comparing purchasing to leasing, there are several advantages to leasing. For example:
- It gives you a competitive edge in your industry. If you are trying to attract new talent to your company, mentioning a new company vehicle as a perk during the onboarding process will certainly make you stand out. If you use a fleet of vehicles for delivery, repairs and replacements are often faster under a lease.
- It improves cash flow. With lower payments and little or no maintenance costs, leasing takes away less from your company’s cash flow.
- It helps you track expenses. Many leasing companies offer an online space to track mileage and fuel usage, which makes the process of tracking your fleet much simpler, and it provides a single portal for you to manage maintenance service needs.
- It lowers driving costs for employees. This is especially true if you have employees with long commutes. They do not have to worry about accumulating additional wear and tear to their personal vehicles.
Without all the upfront costs associated with purchasing vehicles, you can also focus your cash flow on avenues that grow and expand your business.
What Are the Disadvantages of Corporate Leasing?
There are also a few disadvantages to leasing over buying that may affect your specific needs. Some drawbacks include:
- Modifications are not allowed. Most companies will not allow you to make changes to the vehicle beyond adding a removable decal for advertising.
- It can be more expensive. While leasing does save you the upfront costs associated with purchasing, it can cost more in the long term because you will always have a monthly payment. However, with purchasing, you do not have the option to update as often.
- There are mileage restrictions. Closed-ended leases have mileage restrictions that can cost a lot of money if you go over the allotted number of miles before the lease is up. If you know that some or all of the vehicles you need will clock a significant amount of miles, a standard closed-ended lease may not be a feasible option for you.
- You do not have ownership. For some, the idea of making payments without eventually owning the vehicle seems wasteful.
Commercial vehicle lessors may also offer seasonal leases with skipped payments during slow times and value leases for used vehicles with low mileage. You can find options for whatever your budget allows. For more information about corporate leasing, contact the experts at Platform Funding.