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How business car leasing works
Avoid the upfront costs that come with buying a car for your business.
Leasing your business vehicles can lessen the upfront costs of getting your employees behind the wheel. But you may come across mileage limitations depending on the type of contract you choose. And it can be more expensive in the long run.
How does leasing a car for my business work?
Rather than fronting the cash to buy a vehicle for your business outright, you can opt for a business car lease. This allows you to upgrade your vehicle every few years — taking advantage of new technology and safety features — while keeping your monthly costs low.
There are two types of leases available to business owners: open-ended and closed-ended agreements. Both come with a purchase option that allows you to buy your vehicle at the end of the lease term. Or you can choose to return it and upgrade to a newer model.
Open-ended leases, also known as terminal rental adjustment clause (TRAC) leases, are more popular with commercial vehicles because of their short terms and lack of mileage restrictions. This is because you — not the leasing company — are responsible for depreciation, usually referred to as the residual value of the vehicle.
What does this mean for your business? Say you lease a new car at $25,000 and your lease payments are structured based on an assumed depreciation of $10,000. If the car depreciates by $12,000 at the end of your lease term, you’ll have to pay $2,000 to cover the difference. On the other hand, if the car only depreciates by $8,000, your leasing company will have to reimburse you that extra $2,000.
Because your business is responsible for any depreciation, your vehicle can be used however it’s needed.
A closed-ended lease may be more popular with individuals, but it can also come in handy for commercial use too. These have fixed monthly payments, fixed terms and mileage restrictions. Unlike an open-ended lease agreement, you won’t bear the cost of depreciation. And unless you choose to purchase the vehicle at the end of the lease term, you won’t have to worry about how much or little the vehicle is worth.
Closed-ended leases comes with their own drawbacks, of course. Because they usually last anywhere from three to five years, you’ll be stuck with the vehicle for the entire length of the term — unless you choose to end the lease early, which can incur a large fee. And since there’s a mileage limit, you’ll have to pay if you go over. The rate is usually set at around $0.10 or $0.15 per mile, but could be more or less depending on your contract.
If you’re only planning on using your corporate vehicle semi-regularly, then a closed-ended lease may be appropriate. However, businesses that intend to use their vehicles regularly may not get the best deal out of this type of contract.
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Is my business eligible for a lease?
The exact eligibility requirements for a business car lease varies between leasing companies and car manufacturers. However, you generally need to:
- Have an employer identification number, also known as a taxpayer ID.
- Be in business for at least two years.
- Demonstrate your business’s ability to pay for the lease.
- Know the type of vehicle your business needs and the lease term you want.
How much will it cost my business to lease a vehicle?
The cost of leasing a vehicle depends on your contract. With an open-ended lease, you’ll pay a monthly fee as well as the difference between the estimated residual value of the vehicle established at the beginning of the lease contract and the actual resale value at the end of the lease period. With a closed-ended lease, you’ll only need to pay the monthly fee and any additional mileage costs.
Some other costs you might have to pay include:
- Origination fee.
- Servicing and maintenance costs.
- Account maintenance fee.
- Excess wear-and-tear fees.
- Charges for asking to vary the lease terms.
- Early termination fee.
- Late payment or NSF fees.
Should I use fleet management?
Fleet management is ideal if you already have cars for your business but want assistance with the administrative burden. Essentially, you outsource your vehicle management to a different company, which allows for an easy way to track and manage your vehicle expenses — all in one invoice. You may also be able to negotiate discounts on servicing, repairs and fuel.
If you only have a few vehicles and can handle the books, fleet management may not be for you. However, if your business uses a number of cars, trucks or vans, then hiring a company to manage the costs may pay off. Check with your accountant to see if fleet management is a good idea for your business.
What are the benefits of business vehicle leasing?
From lower upfront costs to gaining an edge over the competition, there are a few perks to leasing a vehicle for your business:
- Improves cash flow. Leasing a vehicle typically comes with lower monthly payments and fewer maintenance costs, which frees up cash for you to invest in other areas of your business.
- Lowers driving costs for your employees. Not having to wrack up miles on their own car means your employee can drive without worrying about extra costs added to their job.
- Makes it easier to track mileage and fuel expenses. Some car leasing companies offer an online portal so you can easily see fuel usage and servicing of your fleet of vehicles. This makes tracking mileage, fuel expenses and maintenance a lot less complicated.
- Gives you an edge over the competition. A corporate car can be a bonus that makes your company stand out. And leasing means your employees can upgrade their car to the latest model every few years.
What are the drawbacks of business vehicle leasing?
Trying to decide between leasing or buying a vehicle for your business? Here are a few potential drawbacks to leasing to consider:
- More expensive in the long term. While leasing a vehicle comes with fewer upfront costs, you’ll typically pay more in the long run than if you’d chosen to purchase the car.
- You never own the car. When you choose to lease a vehicle, you’re essentially renting it for a set period of time. This means your monthly payments won’t eventually lead to you owning the car.
- Mileage restrictions on closed-ended leases. If you opt for a closed-ended lease, your employees will be limited to driving their vehicles a select number of miles. And it’ll cost you if they go over that limit.
- Can’t do major modifications. Most leasing companies won’t allow you to do major work on the truck or van you’re leasing to adapt it for your business’s particular needs.
As your business expands, adding vehicles to your fleet through a lease could make the difference between spending thousands upfront or spreading the cost out over time. But you won’t be able to modify the vehicle to fit your business’s unique needs. And it’s usually more expensive in the long run.
Thinking of buying a car for your business instead? Check out our guide to business vehicle financing.
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