Today, we’re going to look at 3 financial benefits businesses get from leasing a car.
Put simply, a car lease is a finance tool that allows a business to acquire vehicles. It is usually done with new cars over a 3-5 year period. Essentially, you are not paying for the full value of the car, just the difference between the purchase price and what the end value is set at. At the end of the lease period, you hand the car back in good condition.
Tax benefits for businesses
Leasing a car lets you claim up to 100% of the cost as a tax deductible operating expense. It makes life very easy for you and your accountant. You won’t have a depreciating asset on your balance sheet. The payments for use of the car are consistent and easy to budget for as the payments are fixed over the term.
Buying a vehicle outright involves a huge upfront capital investment and more often than not will involve a hire purchase contract to fund the purchase. You’re not only paying for the vehicle but also maintenance, insurance etc. With a hire purchase there is often an upfront deposit required. You claim the interest and depreciation cost and it sits on your balance sheet.
Vehicle leasing in most cases is a more effective way to offset costs against tax because it goes into your income statement as a simple operating expense.
How does it price up against Hire Purchase?
Here’s an example of a Ute with a RRP of $50,000: the 2018 Holden Colorado LTZ 2WD Crew Cab. Lease rate excludes optional accessories or add-ons.
At the current lease price (correct at the time of writing), you would make a monthly repayment of $600+GST P/Mth a month over a 48 month term.
Using our Car Finance Calculator, the hire purchase repayment on the Colorado would be $1,343.05 a month over a 4 year period with no deposit applied.
Why does leasing usually price up better? Because you are not paying the whole value of the vehicle off. Just the value between the cost price and sale value at the end of the lease term. Lease companies also have significant buying advantages over most businesses. Therefore, the upfront cost of the vehicle is lower to start with.
Most clients these days see the benefit of changing vehicles out every 3-4 years instead of the old way of simply running vehicles into the ground. The SmartLease fleet management system has hundreds of vehicles being tracked and monitored over many fleets, vehicle types and age ranges. It is very easy to demonstrate the simple economic advantages of implementing 3-4 year replacement programmes when you see some of the maintenance horror stories in some fleets.
Free up capital
Last year, a study by Carspring found that New Zealand has the highest vehicle depreciation rates in the world. Their research showed that a brand new car will lose 5.6% of its value for every 10,000kms travelled. Say the new vehicle cost you $30,000. Imagine what you could have done with that money?
Leasing a car allows you the freedom to use your capital for more productive areas of your business. This could be something like an awesome website redesign, taking an apprentice on or improving your customer service.