The difference explained
Every business has a different set of circumstances based on the requirements of their fleet and acquiring new vehicles is a major financial commitment. One of the key decisions a business will face when acquiring a new vehicle is “Am I best to buy this vehicle outright or lease it?”. When it comes to selecting a new vehicle there’s a lot to consider including the capital cost, the number of vehicles needed, your budget and how long you expect to keep it.
Buying Vehicles Outright
You will retain complete ownership of the business vehicles, which can be appealing but there are several things you should consider before buying vehicles outright:
- Buying outright means you purchase the vehicle which can take significant up-front capital, but you do get the benefit of having no monthly repayments freeing up cashflow within the business.
- Buying outright costs money, it can soak up capital within the business and put pressure on cashflow if there is not enough equity and cashflow within the business to absorb this.
- You do get the ability to claim back GST on the cost of the asset providing your business is GST registered.
- Vehicles depreciate over time, and if you go to sell the vehicle for more or less then the book value this can have tax implications which need to be considered and also might have financial implications if you need to replace the vehicle and you haven’t budgeted for this.
- If you chose to finance this vehicle through your bank or a finance company you need to consider the interest rate, fees and all maintenance charges into account to find out the true cost of credit. This can in some cases add several thousands to the cost of the vehicle over a term of the loan.
- The responsibility of repairs and maintenance is entirely on the business owner.
Leasing a vehicle means the ownership of the vehicle is retained with the leasing company which can help mitigate certain risks associated with vehicle ownership. There are a number of things to consider about vehicle leasing to ensure you are getting the right solutions:
- There are some tax advantages to leasing rather than buying outright.
- You retain capital within the business to use for business growth rather then being tied up in assets.
The monthly payments are fixed and spread across the full term of the lease to assist with budgeting and cashflow management.
- In some cases, you can claim back the GST amount on your monthly premiums providing you are GST registered and the monthly premiums are often tax deductible.
- Lease options can include maintenance meaning all the onerous administrative tasks of managing your vehicles can be managed by the lease company freeing you up to run your business.
- There are a number of options at the conclusion of the lease which can including buying the vehicle at current book, upgrade or re-lease. You won’t have to worry about selling or trading the car, it is all done by the lease company.
- The lease companies have very strong buying power with major dealers due to the number of vehicles they buy each month and they pass these savings onto you if you lease with them.
Leasing and buying both offer advantages depending on the specifics of your business. The key to making the right decision is understanding your business needs and it’s always advisable to seek independent advice before making a decision. If you would like to have a chat to us we are here to help; get in contact with a Lease Link professional and we can help you through the process.