Many small businesses in the U.S. rely on vehicles for their operations. With this in mind, making the right choice when acquiring a business vehicle becomes critical.Â
This guide will walk you through the different options available to acquire your business car, including the difference between a car lease and a hire purchase.
So, let’s dive in!
Option #1: Leasing a Business Vehicle
First up on our list of options is leasing a business vehicle. But what exactly is leasing? Simply put, leasing is like renting. You pay to use the vehicle for a fixed period, but you don’t own it. The car returns to the dealership at the end of the lease unless you decide to buy it or negotiate a new lease.
Commencing a lease contract starts with choosing a suitable vehicle that aligns with your business needs. Subsequently, you’ll need to agree on a term length and the number of miles you expect to drive annually. It’s important to note that exceeding the agreed mileage can result in additional costs.
Additionally, you’ll need an above 700 credit score for leasing a new car. However, many lease companies also accept lower scores, which could mean higher interest rates and larger monthly payments.
Pros and Cons of Leasing a Business Vehicle
Like any business decision, choosing to lease a vehicle comes with its own set of advantages and disadvantages. Here we will consider the pros and cons of leasing a business vehicle.
Pros
Leasing a vehicle has several advantages, including:
1. Lower Upfront Costs: Leasing a vehicle usually requires a lower upfront cost than buying a vehicle. This can help businesses manage their budget effectively.
2. Regular Upgrades: With leasing, you have the opportunity to upgrade your vehicle to a new model every few years. This allows you to take advantage of newer technologies and improved fuel efficiency.
3. Tax Benefits: Under the IRS’s Section 179, businesses leasing a vehicle can benefit from an immediate tax deduction. This rule applies to depreciable assets like vehicles, used more than 50% of the time for business purposes, potentially decreasing taxable income significantly.
4. Maintenance And Repair Coverage: Many lease agreements include a warranty that covers most repair costs during the lease term.Â
Cons
Despite these benefits, leasing also has a few potential downsides.
1. Lack of Ownership: Unlike purchasing a vehicle, you won’t own the vehicle at the end of the lease. This means you won’t have an asset you can sell or trade in the future.
2. Increased Insurance Costs: Leased vehicles typically require a higher level of insurance coverage, which can lead to increased insurance costs.
3. Restrictions on Use: Depending on the terms of your lease agreement, there may be restrictions on how you can use the vehicle. For instance, exceeding a mileage limit can lead to additional costs.
Option #2: Buying a Business Vehicle
If leasing doesn’t align with your business’s long-term goals, purchasing a business vehicle could be the more suitable alternative. Unlike leasing, buying involves paying the full price of the vehicle upfront.Â
Pros and Cons of Buying a Business Vehicle
Consider these pros and cons when buying a business vehicle:
Pros
1Ù« Full Ownership: Once the vehicle is paid off, it becomes a business asset that can be sold or traded in the future.
2Ù« Customization: Owning the vehicle gives you the freedom to customize it to fit specific business needs.
3Ù« No Mileage Restrictions: Buying a vehicle means there are no mileage limits. This could be beneficial if your business requires extensive driving.
Cons
1Ù« Depreciation: Vehicles depreciate over time, which means their value decreases. This can be a disadvantage if you plan to sell the vehicle in the future.
2Ù« Maintenance Costs: Once the warranty expires, you’ll be responsible for the cost of maintenance and repairs.
3Ù« Higher Upfront Cost: Buying a vehicle typically involves a higher upfront cost which might be difficult for small startups.Â
Other Vehicle Financing Options
Apart from leasing and buying a business vehicle outright, there are other financing options available that might better suit the specific needs and circumstances of your business.Â
1. Hire Purchase Agreements
A Hire Purchase Agreement is a contract where a finance company buys the vehicle on your behalf that you then “hire” for a fixed period. You make regular payments over the term of the agreement, and once all payments have been made, the ownership of the vehicle transfers to you.Â
Usually, an initial deposit or down payment is required at the beginning of this agreement. If you fail to make installments, the seller has the right to repossess the asset or property.
2. Chattel Mortgages
A Chattel Mortgage is a loan agreement where the vehicle (chattel) is used as security. Unlike a hire purchase agreement, this allows you to gain ownership of the vehicle at the time of purchase, but the finance company’s mortgage remains until the loan is repaid.Â
Chattel Mortgages can be advantageous as they often offer flexible payment options, potential tax benefits, and the ability to free up business capital by not having to pay the total amount upfront.
Final Words
Exploring different options when acquiring a business vehicle is essential. Leasing offers flexibility and lower upfront costs, while buying provides full ownership and customization opportunities. It is recommended to consider your business needs and hire a financial advisor to make an informed decision that aligns with your goals.
