Do you want to start a car rental business and you want to know if car rental companies buy or lease cars? If YES, here is everything you need to know.
In this business, you will have to consider if you want to buy or lease your cars. If you have adequate funding, then buying the cars won’t be a problem. But if you are concerned about putting up cash from your business for a down payment, consider a lease. Some leases do not require a down payment, but most car loans do. Whether you lease or buy also may depend upon who will be driving the car.
Take some time to determine how much your cars will be driven and where you expect them to reach. Car leasing terms include a limit on mileage and you will have to pay more for the lease if you want additional miles covered. Car purchases, on the other hand, do not have a limit on miles.
Also, if you are going to lease a car for your business, you will have to spend the extra money for routine maintenance, including oil changes and tire rotations. Many leases require maintenance.
Buying Vs Leasing Cars For A Car Rental Business
A car rental business doesn’t need a lot of cars to start with; however, they have to decide if they want to buy the cars outright or lease them. Leasing means a lower monthly outlay – helpful if your cash flow isn’t yet robust – but is more costly in the long term.
Buying your Cars
While outright buying could mean a very high initial cost, but you will own your cars as assets that are yours to sell or trade in later.
Another way car rental companies save money initially is to start by buying second-hand models. This can be a good compromise between leasing the cars and buying new ones. If your business becomes lucrative, you will be able to purchase more and better vehicles to add to your existing fleet.
However, if you decide to buy second – hand, do your research. Shop around, ask questions and source cars that are likely to be attractive to renters as well as being easy to maintain. Car rental businesses are by far the largest car purchasers in the united states.
Most times, they buy new cars in large quantities directly from manufacturers under a “program” contract which guarantees a buy – back price at a certain mileage. However, the manufacturer doesn’t actually buy the cars back. Instead, the cars are sold at auction prices. Sometimes, money doesn’t change hands, but there is an accounting balanced by the purchase of additional vehicles.
Still on new stocks, car rental businesses may also choose to buy directly from the manufacturer in bulk. This gives them buying power for cheaper prices and that is why we see the same brand of cars at all the major rental companies. They put in orders a few months in advance so the quotas can be met.
Leasing your Cars
Leasing (which is the most used in the industry) is not only used by car rental companies starting out. For many established independent and franchised companies, leasing is another financial instrument to put wheels on the road. Leasing vehicles helps Car Rental companies conserve their capital, and therefore reduce startup costs.
Most times, Car Manufacturers offer very favourable leasing deals to Car Rental businesses, especially since it is a good way to offload a large number of vehicles into the market. One key benefit of leasing is to take advantage of the lease company’s purchasing power, which will give rental companies better capitalized costs on vehicles than they could achieve themselves.
Note that car rental companies also use leasing to fleet up with used units, which works well to meet peak demand windows while taking a smaller depreciation hit. This is not always possible when seeking financing, especially if you are trying to use a manufacturer’s captive finance company, which is often restricted to new cars.
Additionally, rental companies must abide by the manufacturers’ rules for keeping cars in fleet for a minimum term, after that, the rental company has the flexibility to sell at an optimal time. There are two types mostly used in the rental business: open – and closed – end leases.
In a used car market with some uncertainty, a closed – end lease might be preferred, as the cost of the vehicle is predetermined for the rental company. Howbeit, the closed – end lease can be written “off – balance sheet,” which would allow the rental company to pursue a bigger line of credit or use capital for other expenditures.
In a closed – end lease, experts believe it is important to understand the potential charges and the parameters and fees associated with the disposal. However, most car rental owners prefer open – end leases, as they say they are confident in their abilities to come out ahead by disposing of the vehicles themselves.
Whether you lease or buy a car for your car rental business depends on cash flow, mileage, and other issues that are specific to your niche and business vision.
Spend the time to research both options before making a decision. But whether the cars in your fleet are from second – hand dealerships or you have decided to buy from a friend, they will need to undergo checks before you can rent them out to paying customers. These checks include assessments to ensure the cars have no outstanding finance liabilities, look at whether they have ever been involved in an accident, and register any mileage discrepancies.