Businesses always decide to lease equipment, vehicles and tools for their business, as it can be a more cost-effective alternative to buying outright, especially when you are just beginning.
When leasing a car, you make fixed monthly payments. At the end of the lease period you won’t own the vehicle but may have the opportunity to extend the lease agreement or start a new one, or you can choose to swap your car after an average of three years for a brand-new one.
This sort of arrangement is becoming increasingly popular among businesses who use vehicles. Leasing also lets you spread the payments over a longer period of time. It reduces your initial cost and helps your cash flow. Lease payments are usually classed as business expenses for tax purposes, reducing the net cost of your lease.
For a relatively low initial payment, followed by regular monthly payments, you get all the benefits of running a brand-new vehicle.
This includes full manufacturer’s warranty cover, which typically lasts for two to five years. Leasing agreements can have servicing and maintenance added to the monthly package. This allows you to better predict the cost of motoring and avoid the nasty surprise of unexpected repair bills.
Leasing also has some drawbacks. You don’t own the vehicle and therefore it cannot be taken to cover any debts if the business has financial difficulties.
Also, annual mileage is one of the crucial factors that decides the cost of leasing a new vehicle – the more miles you do, the more expensive the monthly payment will be, and with vehicle leasing you are committing to paying hundreds of pounds each month for the lease duration.
Leasing a car or truck under your business name instead of through a personal credit profile, is becoming popular among even the smallest of companies.
Some business owners like the idea of having newer cars, while others don’t like putting so much wear and tear on their personal vehicles. Some are also hoping to expand a sales force or add more field reps and want to keep a consistently branded theme and record of reliability in their client dealings.
Just like with leasing generally, there are many reasons why you should consider leasing with your business, instead of through your personal credit profile.
For instance, when you lease a car through your business, you benefit from better lease deals strictly set in place for business users. Although you still have to pay company car tax, but it’s often cheaper than personal car tax.
Also note that when you choose to lease through your business, even if you use vans or pickups, you pay a fixed car-tax rate. You also avoid paying VAT on leasing payments (if VAT registered).
Leasing through your business comes with many benefits that it becomes easy to forget the possible drawbacks. Business comes with challenges that ultimately affect finances and the ability to keep up with payments. Also leasing through your business becomes a potential risk directly to your company.
Always endeavor to properly analyze your business situation and possibilities before making financial related decisions like this.
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Detailed Guide to Lease a Car Through Your Business
If you see the need for business vehicle lease, it’s critical you understand the facts so that you don’t overpay, or – worse yet – get penalized for driving the vehicle in a way that’s counter to the lease agreement. Below are some basic steps to getting the business vehicle you want at a reasonable price.
Understand Business Vehicle Leasing Guidelines
Leasing a car through a business is not meant for everyone. Following the legal guidelines for claiming vehicle expenses, business owners can easily lease a car through a personal account and either write off qualified business costs or take a standard mileage deduction.
But when you have a complicated business structure, want to drive a car 100% for business, or want to own a fleet of business vehicles, it makes sense to separate out the lease cost through a business lease.
Also understand how long you want to own a car. If you like the idea of keeping a car for a long time (ten years or longer) so that you can take advantage of lower taxes, licensing, and insurance down the line, leasing likely won’t be for you.
It is basically an ideal choice for those who want a new car every few years, don’t have much cash for a large down payment, and aren’t concerned with the sentimental value of car ownership.
Although some consumers think of a dealership as the first stop on their quest for the right car, it’s advisable you don’t limit yourself to just these formal showrooms.
Some banks and auto manufacturers have leasing programs as well. If you drive your new car as part of a ride-sharing service, those companies have leasing programs specifically for their drivers.
Consider Customized Solutions
The type of vehicle or vehicles that you choose can differ widely depending on your specific needs. If you’re just looking for a simple passenger vehicle, then this part of the process may be fairly similar to buying or leasing a car for personal use. You could simple find an in-stock option and then work with the dealer to fine-tune the details.
But, for companies that need fleet vehicles, heavy duty options or cars with very specific features, you might instead work with a dealer to create a customized solution. To do this, you’ll first need to have a very clear idea of what your needs are.
You may also have better luck getting the ideal vehicle if you give yourself some time to shop around and work with a dealer on customization options, rather than desperately searching for something that you can drive off the lot in a single day.
Understand the Costs
Through leasing you can enjoy a more affordable way to get a newer-model vehicle, but it doesn’t have the simplest payment structure. When compared to buying a car outright, leasing can have a maze of options, all with varying terms, prices, and penalties. Below are important terms you need to know before you sign any contract:
- Capitalized cost – or “cap cost” — is simply the cost of the lease. Expect this to be much less than the MSRP when you’re done negotiating.
- Cap cost reductions are discounts that can help you reduce the above capitalized cost, such as rebates from the factory, the value of a trade-in vehicle, or friends and family discounts.
- Residual value is the worth of your car at the end of the lease term, provided you don’t get out early. You and the dealer will agree on the value at the end of the lease, but you should aim for this to be as low as possible if you want to buy the car at the end of the lease outright. If you have no desire to buy the car, you can focus on a higher residual value, which will leave you with smaller monthly payments.
- Also, the interest rate is known as the “money factor” in a lease agreement. This number should be a value that, when multiplied by 2,400 gets you to your annual APR. (A money factor of .00028 would equal an APR of 6.72 percent.)
- Coupled with the monthly lease payments, expect to budget for any down payment, sales tax/title/licensing fees, and any additional local or municipal taxes or fees for purchasing a new car.
This is the point you get the deal you want. If you have chosen a car, know what the MSRP is, and also negotiate down the cap cost to a price that gives you comfy monthly payments and a low down payment. Smart buyers should also consider whether they want an open or closed lease.
Open lease contracts are typical for business vehicle leases, and the buyer is committed to paying any difference between the residual value and the actual resale value. If you drive the car too much or damage it, the dealer can come to you to get the money they would have gotten if they sold it at the agreed upon residual value.
While closed leases don’t consider the residual value at the end of the lease, but rather any mileage beyond the original agreement and payment for damages. If you keep within your mileage terms and don’t dent the fender, you can walk away from a closed lease without any surprise costs in the end.
But have it in mind that business leases are generally open because businesses put a lot more miles on their vehicles than consumer do. It may be cheaper in the long run to pay a difference in value than a mileage overage.
Indeed leases can be tricky, and many business owners put off committing to one because of all the bumps to the contracts and pricing.
If you do your research, however, take time, and compare pricing, you can come out of a leasing office with a new car that projects professionalism, gives you reliability, and offers some flexibility in your transportation budget. If freeing up cash is your aim, there is no comparison to what leasing offers.
In order to deduct the actual expenses incurred for a vehicle, proper books and records with itemized receipts must be maintained.
Actual expenses include the business percentage of gasoline, oil, insurance, parking, registration fees, repairs and other maintenance. Self-employed individuals may also deduct interest paid on a loan used to purchase the vehicle.