Is it better to buy or lease a vehicle for your small business?
If you’re thinking of adding to your fleet or need a new car or van to get yourself to each job, then you may have looked into both leasing and buying options. As a small business, making every investment count is key to keeping your cash flow secure, which is why it’s important to be fully informed of the options before you make your final purchase. To help, we’ve put together the pros and cons of leasing and buying a vehicle for your small business.
Leasing a vehicle for a small business
There are plenty of company car and van leasing options out there. Depending on your budget, business needs and type of vehicle you need, you’ll be able to find an appropriate leasing agreement deal. Yet before you sign off on this commitment, you need to be fully aware of the risks and benefits involved.
Advantages of leasing a company vehicle
Whether you need a specialist vehicle like a tipper or a bigger van to meet your business’s growing demands, leasing a vehicle for your business gives you more flexibility with less upfront investment. The main benefits of leasing a company car or van are that you can:
- Upgrade your vehicle more easily: whether you want a top-class SUV or a dropside truck with a few extra home comforts, leasing agreements mean you can drive a brand new vehicle without having to put up all the cash at once. This will keep your business running efficiently and ensure you look professional in the eyes of your customers.
- Benefit from tax and VAT deductions: depending on the specific leasing agreement and the type of business you run, you can reclaim between 50% and 100% of VAT payments and deduct the lease amounts for corporation tax purposes.
- Stay protected from any depreciation in the vehicle’s value: particularly in the first couple of years, the value of a commercial vehicle can drop significantly. With a leasing agreement, you don’t have the hassle of selling the vehicle at the end of the fixed term, meaning you won’t have a depreciating asset on your books.
- Have predictable automotive outgoings: though most leasing agreements require you to put down a deposit, you’ll only then have monthly payments to take care of for a fixed term, meaning you have predictable and regular costs to cover.
- Get a warranty, repairs and services included: depending on the type of leasing agreement you have, you can get a manufacturer’s warranty, road tax, MOT and any maintenance or breakdown cover included in one single payment. It also means you don’t need to worry about arranging for any servicing or repairs to be made.
Disadvantages of leasing a company vehicle
Although leasing a commercial vehicle gives small businesses lots of choice with less commitment, there are some downsides to entering into a company car or van lease agreement, including:
- Mileage limits: at the start of an agreement, you’ll need to set out how many miles you expect the vehicle to cover during the fixed term. Going over these limits will incur extra charges at the end of the lease.
- No ownership: some lease agreements mean you have no option to buy the vehicle at the end of the term, meaning you won’t get a long-term return on your investment. It also means you can’t count the vehicle as a company asset, even if it goes up in value.
- Stipulations on tax deductions: certain vehicles with CO2 emissions levels of more than 110g per km or those leased under particular types of agreements can’t be deducted from corporation tax.
- Restricted modifications: as you don’t own the vehicle. you can’t customise it with your business’s branding or modify it to your needs. It also means you’ll be charged for any damage to the vehicle at the end of the term, which is important to consider if other drivers will be taking them on and off site.
- Fixed T&Cs: the leasing agreement isn’t just fixed for a certain amount of time but is likely to have specific conditions such as fees for returning the vehicle early or exceeding the mileage allowance. Commercial lease vehicles often need to be covered by full comprehensive insurance too, which you’ll have to arrange and pay for separately.
Buying a vehicle for a small business
The most traditional route for getting a commercial car or van, buying a vehicle through your business is a very straightforward option, but there are some drawbacks which you need to keep in mind.
Advantages of buying a company vehicle
As simple as finding the car or van you want and making a purchase, there are many benefits to buying a commercial vehicle outright, including:
- Adding an asset to the business: a vehicle you buy outright through your company and use for only business purposes will be a long-term asset that you can keep for as long as you want rather than for a fixed amount of time.
- Having no mileage restrictions: with no leasing terms to meet, you won’t have any restrictions on the number of miles your vehicle can cover in a year or over the fixed period.
- Getting depreciation tax benefits: if the vehicle is used for business purposes for at least 50% of the time, then the full cost of the car or van, plus any running expenses can be put against your company as tax deductible costs.
- Making customisations freely: there are no restrictions on the type of changes or modifications you can make to a vehicle you own outright, meaning you can add branding, storage or other accessories to make it fit for purpose.
- Having no monthly payments: if you’ve already paid for a car or van yourself without having to take out a loan, then you don’t have to commit to paying an amount every month for a fixed term.
Disadvantages of buying a company vehicle
Though you will own any vehicle that you will buy through your business, there are some considerations you need to keep in mind before making a purchase:
- Repairs are your responsibility: this means you need to arrange any breakdown cover, maintenance and servicing yourself alongside any insurance cover each driver needs. This will be an important responsibility, particularly if your employees will be driving the vehicle.
- You’re subject to asset depreciation: vehicles are known to depreciate significantly over their lifetime, so it’s unlikely that any car or van you buy will be worth the same amount when you go to sell it.
- You’ll have upfront and ongoing costs: as well as putting up all the cash to pay for your company vehicle, you’ll need to cover any costs such as road tax, MOTs and any relevant insurance cover.
- Selling is your responsibility: unlike with leasing, you will be responsible for taking the time and effort to sell the car or van whenever you want to get rid of it.
- It will be more difficult to upgrade: if you want a vehicle with better technology, more features or smarter looks, then you’ll need to find the full amount of cash again to buy the new model.
How to decide whether to lease or buy a vehicle
It’s important to keep in mind, that although following the above tips can help you decide whether to go for a buy or lease option, you will still need to do your own research to find a deal that will meet your business’s requirements. Whether it’s the type of vehicle, the way it will be used or the monthly costs, shopping around and answering the following questions will help you make the right decision for your business investment:
- What type of vehicle do you need? If you’re looking for a new vehicle, then leasing allows you to pay for one affordably. Alternatively, second-hand vehicles can be purchased outright relatively cheaply.
- How many miles will it cover? Leasing agreements have restrictions on the number of miles you can use the vehicle for in a certain period, so if you plan on doing more than this per year, this sort of lease might not be appropriate.
- Can you pay for it immediately? If you have the cash upfront, then it might be worth putting this money into a car or van. If you don’t, then paying off a monthly leasing agreement means you can still get the vehicle you want.
- How long do you want the vehicle for? Standard leasing agreements usually last for five years or less, so if you want to keep the vehicle for longer than this, then you might want to consider buying it outright. If you only need the vehicle for a very short amount of time (for example, to cover a three-month customer contract) then it would be worth shopping around for some short term leasing deals.
- What will the vehicle be used for? If you want to customise your car or van, then buying one outright might be the best option. If employees are going to be driving the vehicle, then having breakdown cover, servicing and MOT costs wrapped up into a monthly lease payment might be more cost-efficient.
Once you’ve answered these questions and weighed up the advantages and disadvantages of each purchase option, you’ll be able to narrow down which might be best and make the right investment in a company vehicle.
