A startup car can significantly impact your business and the potential profits you could gain. For instance, it enhances your business appearance and impresses clients by demonstrating business success. A car is part of your brand. Most importantly, it streamlines your team member’s commute and can be an important logistical and marketing factor.
Lucrative as it is, there are numerous expenses involved when operating a motor vehicle as part of your startup. The cost of the automobile itself and maintenance expenses might overwhelm your startup operations.
Not to mention the tax consequences, fuelling, insurance, among others.
When looking for a company vehicle, car leasing vs. buying is a top question for startups and SMEs. Unfortunately, there isn’t a hard and fast rule to determine the appropriate option for your startup. However, several factors influence a lease or buy decision.
This article provides insights into the top considerations to weigh before leasing or purchasing a company car. It also sheds some light on the pros and cons of each option to help you make an informed decision.
Car leasing vs. buying: factors to consider
The total cost associated with the lease or purchase is a significant factor when deciding the appropriate model for your startup.
In most cases, leasing a vehicle has lower upfront costs than the down payment required to purchase the same automobile. In addition, you are liable to pay fixed monthly fees for a leased car and other mandatory maintenance costs. Finally, you can purchase the vehicle or return it to the dealer at the end of a lease term. The former might be advantageous to buy the car upfront since the total cost of the automobile over its life will be less.
On the flip side, you will have no equity or residual value to show for the investment in a leased car at the end of the hire. Purchasing a vehicle grants ownership rights, freeing you from future car payments. As a result, in perspective, leasing a car might cost more in the long haul than purchasing one. It all comes down to your cash position.
It’s common knowledge that a brand-new car loses value once you drive it off the forecourt. Also, the leasing company figures out the depreciation value to let you know the car’s worth after the lease period. Therefore, you don’t absorb the total depreciation cost of the vehicle.
Leases tend to allow low-mileage use scenarios. Unfortunately, this might limit a startup that intends to drive a great deal. Most leases restrict your mile usage, and if you exceed your allotted miles, you are liable to a specific rate for every extra mile.
This penalty can accrue to a substantial bill to pay at the end of your lease if you amass a lot of miles. On the flip side, if you claim whole car ownership, you can cover as many miles as necessary without limitation. Still, this will take a toll on your vehicle’s depreciation, so owning might not be viable if you intend on selling the car in the foreseeable future.
Tax deductions relating to business vehicles are a tax advantage startups, and SMEs should leverage.
First and foremost, there are no upfront sales tax charges when leasing a car. On the contrary, you must pay tax on a vehicle upfront during purchase. The good news is that it’s possible to deduct this tax on an automobile you acquire for business use. In addition, owning a business vehicle implies that you can subtract a depreciation value over the vehicle’s life. On the other hand, it’s impractical to deduct depreciation tax on a hired car.
Car leasing: pros and cons
The most notable advantage of leasing a car is the low upfront costs when acquiring and maintaining the vehicle. Some firms cover regular maintenance costs as part of the lease contract, saving you repair expenses you might have incurred with an owned vehicle. In addition, the monthly payments on a leased car are significantly lower than paying for a car on loan. As a result, you can free up money to invest elsewhere in your startup’s operations. Other benefits of leasing a vehicle for your startup’s functions include:
- Leasing a car might offer tax advantages if you use the vehicle solely for business purposes.
- Easy turnover after the end of your lease. That is, you don’t have to worry about selling or disposing of the depreciated asset.
The mileage restriction is a significant drawback to leasing a startup car. Also, some leasing companies don’t allow you to customize the vehicle to reflect your brand. In addition, you must return the automobile in a well-maintained condition or else you will have to pay extra charges. Finally, insurers tend to charge more for leased vehicles. While there are a few insurance policies to choose from, a fully comprehensive insurance cover is the better option, albeit more expensive.
Car buying: pros and cons
Again, the most notable benefit of purchasing a car is that you own it, freeing you from any monthly payments and giving you control of what you do with it. As such, you can customize it to your brand preference. Also, you can sell it anytime and recover some of the original investment. Most importantly, you don’t have to worry about exceeding mile restrictions.
Finally, unlike car leasing, insurance premiums tend to be lower if you purchase a car.
The disadvantages of buying a car for your startup include:
- You are tied up in a depreciating asset.
- You are solely responsible for maintenance and repair costs. Bear in mind, these expenses tend to increase as the vehicle ages.
- The initial cost of buying a car outright can be enormous. Moreover, monthly payments can be higher than leasing a vehicle.
Car leasing vs. buying: which is best for your startup
Ultimately, the ideal option for your startup comes down to the circumstances and your business goals. For instance, if you drive extensively for business purposes, buying a company car might be a viable option. On the other hand, if you need an automobile on a short-term basis, you might have to settle for car leasing. In sum, you have to scrutinize each of these highlighted factors and create a plan that works best for your startup.