What are the advantages and disadvantages of leasing vs. buying fleet vehicles?
We look at what fleet managers need to consider
Leasing vs. buying fleet vehicles? It’s one of those questions that most, if not all, fleet managers have had to answer. And there’s not always a simple or straightforward solution.
The decision whether to lease or buy some or all of your company’s fleet needs to be based on many factors.
Looking at the some of the short and long-term benefits and the main differences between the two options can help you make that choice.
1. Financial considerations
The lease vs. buy decision more often than not is influenced by your company’s financial situation, which itself can also change over time. At the onset, buying vehicles tends to be the most expensive option when compared to the monthly agreements often associated with leasing. However, there are other aspects that can affect these costs over a set period of time that should be considered too.
Whilst purchasing fleet vehicles puts assets on your balance sheet, it can also impact your debt-to-equity ratio, making your company appear less attractive to lenders or investors. Lease payments, on the other hand, are often treated as off balance sheet expenses. Leasing for a monthly fee generally means that investment capital can be utilized for other core business purposes.
There are also tax and depreciation costs to consider. As the value of owned vehicles depreciates over time, such expenses can lower taxable earnings. With leased vehicles, these depreciation benefits are accrued by the leasing company.
Another consideration is that different types of lease agreements have varying financial benefits. With an operating lease, tax benefits may be realized when lease payments are deducted from your income statement. Under a capital lease, it may be possible to claim depreciation and deduct interest expenses from lease payments.
2. Meeting business needs
How often do you tend to replace your fleet vehicles? When it comes to meeting the needs of the business, the leasing vs. buying fleet vehicles question centers on what you consider to be the service life of an asset.
Whilst fleets may find that leased vehicles allow them to operate newer models with the latest fuel saving and safety technologies available, flexibility for vehicle replacement is often a primary reason that companies choose to purchase vehicles. When changing equipment needs require different specifications, ownership may be more beneficial.
Vehicle owners are also not subject to mileage or wear and tear limitations that come with some leases, nor are they required to keep vehicles for a certain amount of time. With ownership you can remove a vehicle from your fleet at any time with no additional penalties.
In general, the main types of leases include open-end agreements that have a minimum initial term and then allow for additional options. Closed-end leases, which are fixed term agreements, have penalties associated with early cancellation.
3. Maintaining the fleet
The number of vehicles your company needs to maintain can be a deciding factor in the determination about whether to own or lease a fleet. For smaller fleets, operating a workshop, purchasing tools and equipment, and hiring technicians may be cost prohibitive. In these cases, maintenance at a predictable cost under a lease is usually the clear choice.
Even for larger fleets, however, considering the cost of maintaining the fleet is important. And for all types and sizes of fleet operations, the widespread shortage of trained and certified technicians may influence your decision.
4. Administration demands
Beyond removing fleet maintenance management responsibilities that come with vehicle ownership, leasing can also remove other time-consuming administrative burdens.
Leasing is not just about less paperwork when compared to owning vehicles. Depending on the structure of your organization, it can also mean lower payroll costs too.
Among the administrative services that can support your operation under a lease agreement and save time are the management of titles, registrations and property taxes. Additionally, some leases can include fleet driver related services such as training, licenses and medical requirement compliance.
What does your fleet say about your company?
In service industries, fleet vehicles are often the face of the company. They portray a company’s image to customers and to potential clients. If ownership means keeping vehicles longer, newer leased assets can showcase your success.
Newer vehicles also send a positive message to your employees. Being assigned latest model units with the newest safety, communications, navigation and other systems and technologies can help improve morale, productivity, efficiency and even attract and retain drivers.
Making the best choices
To lease or to buy is a decision every fleet manager may face and there is no right or wrong answer to this question. Ultimately, the decision depends on what is best for your company at any point in time, so it’s crucial to base your choice on current needs and weigh the pros and cons accordingly.
Fleet management software can help you consider all of the relevant factors. It’s a very useful tool for analyzing a variety of scenarios and generate reports that compare the costs of leasing and buying, and how service lifecycles impact your current fleet and the business it supports.
The process of making the right lease vs. buy decisions depend on a number of factors. To effectively compare the benefits of leasing and purchasing, it’s important to fully examine all of the advantages and disadvantages of each choice.