Should I buy or lease a fleet vehicle?
Factors that impact fleet vehicle purchase or leasing
- Cash flow needs
- Size of fleet
- Vehicle type and turnover
- Administration and maintenance capability
- Flexibility vs. commitment
Fleet vehicles are essential to many industries, such as transportation, construction and emergency services. If you are a small business owner starting up or seeking to expand a fleet of vehicles, you’ll need to decide whether to lease or buy the assets. While many variables impact which option works best for your business, get started by considering these five factors.
Cash flow needs
If your business frequently faces cash flow challenges, leasing allows you to make smaller, predictable payments. As the lessor holds the vehicle titles, however, you have no equity in them. Your payments are money spent, not invested.
The up-front cost of leasing is less than ownership, but depending on your business situation, leasing can be more expensive over time. In addition to monthly lease payments, consider the cost of fuel, fleet management services and whether you aim to purchase insurance and maintenance coverage as part of a leasing agreement. Watch out for hidden fees or penalties in the contract as well.
Purchasing commercial vehicles or equipment is costly, and paying cash for fleet vehicles impacts your funds immediately. Even if you decide to finance the purchase, you still need to make a down payment and pay any taxes and licensing fees necessary for ownership. Owning the vehicle means you take the hit for any depreciation, but you are also entitled to tax deductions for the value lost. Over time, owning fleet vehicles can be more cost-effective than leasing.
Size of fleet
A fleet is simply a group of vehicles owned by a business, and can comprise two vehicles or hundreds. There are special financing benefits that come with larger fleets, however. Many vehicle manufacturers or dealerships offer fleet financing incentives for businesses with at least 10 vehicles, or for those that purchase a minimum number of vehicles within a given period. This usually lowers the cost of vehicle acquisition through rebates, retail incentives and reduced fees. Some manufacturers also offer lines of credit to help you expand your fleet — with their company, of course. Be sure to check their rates and fees closely before you sign.
Vehicle type and turnover
The type of vehicle you require influences whether leasing or owning makes more sense. Typically, passenger automobiles and simple box vans for delivery are optimal assets for leasing as they are upgraded frequently and are easy to replace. If you have a high vehicle turnover rate — for example, vehicles that need to stay in prime condition — leasing allows you to trade in consistently.
More specialized vehicles such as construction equipment, on the other hand, may not require much turnover at all. If it’s designed to withstand heavy wear and tear, and so requires little turnover, it may be better suited for ownership.
Administration and maintenance capability
One of the key benefits of vehicle leasing is that much of the administrative work — such as handling titles and registration, license renewal and insurance policies — is handled by the lessor or a fleet management company. Moreover, you can avoid the headaches of mechanical issues with a full maintenance package as part of the lease. For businesses with large fleets of passenger automobiles, the administrative and maintenance support can save significant work hours and stress.
For smaller fleets, however, administration may not be as overwhelming. If you are comfortable with the paperwork, ownership allows you to eliminate the need to pay for third-party management. If specialized vehicles and equipment are a core part of your business, you may be adept at — or even prefer to — handle maintenance issues yourself.
Flexibility vs. commitment
Leasing is ideal for businesses that want more flexibility and less commitment with their vehicles. Leasing arrangements often come with mileage limits, which you avoid with owning. If control is a more important factor, ownership makes more sense. You have access to the equipment when you need it. Your business gains equity in the vehicle and you can sell it at any time. If you take good care of the vehicles, you may be able to keep them in use for much longer than the duration of a typical lease.