Maintaining an effective commercial fleet for your business requires knowing and understanding the differences between both financing and owning. For most companies, cash flow is typically the reason behind decisions to purchase or lease assets such as fleet vehicles. Leasing is usually the best option for most fleets of 25 or more vehicles. Ownership can be an attractive option for companies with existing and excess capital. It can also be attractive when high leasing interest rates would make leasing the least economically beneficial option.
When Should You Pay Cash?
Purchasing fleet vehicles for full ownership is also an option as long as funds are available and you are comfortable with the loss of funds. If your company’s after-tax profit is greater than the expense of the finance or lease cost, it may be a good idea to reinvest those funds back into your company.
When Cash Flow Is Accessible, What Advantages Do You Have?
Here are a few benefits of ownership:
- Lower Acquisition Cost: By purchasing fleet vehicles rather than financing or leasing, you avoid any associated fees that come with financing, including interest, leasing fees, etc.
- Depreciation Control: Owning allows a company to control any resale pricing, including selling at retail price rather than wholesale.
- Lower Insurance Cost: Banks and leasing companies typically require low insurance deductibles which drives up monthly insurance costs. Ownership allows your company to control your insurance deductible by increasing it monthly to lower your monthly insurance costs.
- Tax Benefits: Companies with fleet purchases can also qualify for an additional depreciation and/or IRS code. Consult with your company’s CPA to review your options & recommendations.
How Depreciation Affects Your Company
As the lessee of fleet vehicles, you have the advantage of deducting a monthly payment for vehicle use instead of taking the yearly depreciation expense as the owner.
Get The Benefits Of Ownership Through Financing
Financing your fleet vehicles also offers the same benefits as a cash purchase. It allows you to conserve cash by providing the means to pay the balance of your loan over time. Financing may also qualify you for bonus tax savings.
Drawbacks To Financing
Financing, when compared to leasing, has a higher monthly payment. It also requires a reasonable down payment, giving your company an initial out-of-pocket burden. Financing can result in negative equity if the fleet is intended to be cycled out prior to the end of the loan term.
Differences Between Leasing And Financing
A lease finances the use of a vehicle while a loan finances the purchase of a fleet. Leasing allows you to forecast your monthly expenses for acquiring the fleet. There are two types of leases:
- Operating Lease: Usually allows for off-balance sheet treatment of assets leased, which is preferred by most corporate financial management. The responsibility of vehicle maintenance and associated costs with an operating lease may fall under the lessor or the lessee.
- Capital Lease: The United States and Canada require the lease to be capitalized, meaning the leased fleet vehicles must be recorded on the lessee’s balance sheet along with any corresponding liabilities and include any depreciation on the lessee’s books.
Vehicle Sales And Leaseback Financing
Financing options are available, under a contract hire agreement, in which a company purchases some, or all, of your vehicles and leases them back to you. Your new financing company then takes ownership of your fleet vehicles, including but not limited to, resale values, disposal risks, and unexpected repair costs. This option allows you to release capital within your business while still maintaining full use of your existing fleet.
Self-funding Acquisition And Leases
Self-funded fleet leases and company ownership have the same administrative requirements. However, they differ in accounting and tax requirements. Self-funded fleet leases do not include the same administrative fee as a lessor-funded lease since the lessee is the funding source, and the level of profit is given to the lessor.
If you’re interested in expanding your fleet inventory, take the time to be proactive and learn about your business’ credit score.