By David Kreller of Acme Truck & Auto, Inc.
In today’s business environment, having options is often considered a key to success. When purchasing a business vehicle the typical choice is to pay cash, or seek a traditional bank loan. Leasing is a third option that is growing in popularity.
Leasing allows the business to use the vehicle for an agreed upon time (typically 12-60 months) and to return it at the end of that term. Your monthly payment is calculated on the difference between the capitalization cost and the residual value. The capitalization cost could be considered the same as purchase price if using other financing options. The residual value is the agreed upon value of the vehicle when it is to be returned at that future date.
The lease assumes the vehicle will be returned in acceptable condition and with an established amount of allowable miles. Naturally, additional costs may be incurred if the vehicle has unintended wear or excess miles.
When leasing, the agreed upon price of the vehicle is negotiated, just like paying cash or using a bank loan allowing businesses to shop for the best deal possible.
The advantages of leasing include:
- Paying for only the portion of the vehicle you use, not the entire vehicle
- Ability to trade to a new vehicle more frequently
- Often lower down-payments or equity investments vs. traditional bank loans
- Leasing typically does not go against your lending limit as does traditional bank loans
- And, in many cases, the entire expense of a business vehicle lease payment may be deductible, but of course consult with your tax advisor for specifics.
- There is no equity in the vehicle at the end of the lease. The monies spent are purely an expense
- Exceeding the mileage limitations will result in additional costs
- If intending to keep the vehicle, the cost to purchase the vehicle for the residual value at the end of the term.
- Leases may be subject to additional fees including disposition fees, early termination fees, and excess mileage or wear & tear charges to name a few.
According to Lease FinancePartners, a Kansas based business leasing entity, leasing accounts for over 30% of all new vehicle sales each year and that 80% of all Fortune 500 companies lease something. While leasing is not for everyone, it is another option to consider when purchasing your next business vehicle.