To lease or to own? This is one of the biggest questions a fleet manager will have to answer, and the decision will have major consequences down the road. Although neither choice is necessarily better or worse than the other, they each come with different benefits. Understanding how leasing and owning work is the key to making an informed decision that best suits your business.
Let’s Start with Owning a Fleet
The first thing to understand about owning your vehicles is that, because you own the assets, you own any depreciation that accrues over time. Therefore any damage or general depreciation that occurs while you own the vehicle is incurred by you, the owner.
This can be a good or a bad thing. If the vehicle maintains its value over time, you could resell it for more than expected. But the opposite is also true. You could wind up owning a vehicle with very little value in the resale market. Whatever the case it’s important to be aware that as the owner you are responsible for both the assets, as well as reselling the vehicle at a later date.
Another aspect of owning is the control you have over your vehicles. You get to build exactly the fleet your business needs. This however also means that you do not always have the flexibility that comes with leasing vehicles. Most owners expect to use the vehicles they purchase for a five year period or longer, whereas those who lease tend to have a shorter vehicle turn over rate, and a greater need for flexibility. It’s also important to note that fleet leasing management companies often have programs to provide you with both the control of owning and the flexibility of leasing.
What About Leasing a Fleet?
Leasing comes with a few unique advantages. First of all, leasing allows you to only pay for the usage of a vehicle, rather than accruing depreciation. Therefore, if you cycle through your vehicles in a short period of time, let’s say under five years, leasing may be the better option.
Leasing is also considered an operating expense. These expenses can be written off your bottom line, meaning that there are certain tax benefits to leasing over owning. Another tax benefit is the flexibility of paying rental tax over time versus up-front sales tax in rental tax states (approx. ⅔ of states).
Leasing also ensures that you have one predictable low monthly payment, no upfront fees and the freedom to invest any cash flow in core business objectives rather than having it tied up in an operating expense. If your company frequently needs new vehicles and benefits from flexible cash flow, leasing is the way to go.
How Do You Make a Decision?
Two of the most important questions to ask yourself are:
Where are your vehicles located? What are they being used for?
Companies that are small and localized may be good candidates to own. This is because they are more likely to form relationships with local vendors who can provide benefits on service and maintenance. This is not to say smaller companies can’t lease, or that they can’t benefit from a fleet management company, but simply that many small local businesses are good candidates to own their vehicles.
Owning may also be a good option for service related companies--roofers, painters, AC repair companies. These service companies put a lot of wear and tear on their vehicles as a regular part of their operation. This means the vehicles’ resale value will depreciate quickly. Conversely, if you plan to use these vehicles for their entire life and don’t care about the wear and tear put on the vehicle, owing may be your best option.
Who Gains from Leasing a Fleet?
Some people would say "everyone" but who can benefit the most? Sales and service men often lease. They need attractive vehicles and usually have a high vehicle turnover rate of under five years. Basically they need something new more often, so rather than accruing those four years of depreciation and tying up a lot of time and money in buying and selling vehicles, leasing makes the most sense.
Leasing is also better for national companies. National companies may need maintenance and vehicles anywhere in the country and it’s more efficient to have an expert lease management company handle these needs than to tie up internal resources handling them.
Remember, every company has its own unique needs when it comes to vehicle management. Understanding the benefits of both leasing and owning will help you find the right solution to your business' specific needs.
Be on the look out for our next blog about another option business owners have to get their team on the road--reimbursement.