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Leasing vs Financing for Business Owners

03/06/2019 @ 3:13 AM

Depending on the type of business you operate, you may be thinking about buying a company vehicle.

This can be an exciting entrepreneurial milestone as vehicles help businesses broaden their reach to other regions and have the potential to help open new business opportunities. If this is the direction you’re headed, you’re probably trying to figure out how you’re going to afford such an endeavour.

Thankfully, you have options.

Much like purchasing a personal vehicle, you can choose to either lease or finance through a business car loan in Scarborough. Deciding which one to go with depends on the needs of your business, in both the short and long term.

To help you weigh out your options, we’ll be decoding the difference between the two and outlining the pros and cons of each so you know exactly what’s best for you and your company.

Businessman renewing his lease term on a new company vehicle.

What Is Leasing?

Leasing out a business vehicle is like signing off on a long-term rental.

The lessee (that’s you!) agrees to pay the leasing company in monthly installments over a fixed term for the privilege of borrowing that vehicle. These sort of agreements typically last an average of three years.

Under the lease agreement, there are usually terms that limit the amount of mileage you can put on the car. If the lessee surpasses that cap, there are fees in place to make up for it. Agreements also stipulate the condition the car must be returned in after the lease term is up. Besides some minimal wear and tear, leased vehicles must be returned in almost impeccable condition.

At the end of the term, the lessee can either return the vehicle and restart the process with a new one, or pay off the remaining balance on the leased car for the chance to own it for themselves. If they decide to return the vehicle, the leasing company will take it back and put it on the market to resell.

The Benefits Of Leasing For Business Owners

For business owners that like the thought of renewing their car every couple years, leasing might be the option for you.

As we mentioned earlier, as soon as your lease term is up and you have to return your vehicle, you are given the opportunity to restart the process all over again but with a new set of wheels. If you work in an industry that has to keep up with certain appearances, leasing allows you to upgrade every couple years without having to dig too deep into your pockets.

As an added bonus, most car maintenance fees are covered under the lease agreement which takes the additional expense off your back. If you’re thinking dollar signs, leasing is also the more affordable option, especially if you’re just focusing on the short-term. The initial downpayment and monthly installments are usually much lower than car loan payments. Why? Because you’re only paying the depreciation of the vehicle while you’re leasing it as opposed to paying back the full value of the car with a business car loan in Scarborough.

The Disadvantages of Leasing for Business Owners

If car ownership matters to you, then leasing is not for you. Under a lease agreement, you’ll be making monthly payments for the privilege of using the car, but not to own it. While payments are lower than they are for car loans, leasing is only beneficial in the short term. If you continue entering into new lease agreements after each term, you’re potentially throwing away thousands of dollars down the drain, when you could have owned at least one or two vehicles within that same time period.

Apart from the lack of ownership, there’s also a lot of contractual limitations set on lease agreements that can make it unappealing. If you plan to make a lot of company deliveries or drive across the city to meet up with clients, leasing may not be as beneficial to you as agreements typically have limitations on mileage.

If you’re looking to customize your company vehicle, leasing might not be the right option for you either. Since leasing companies are responsible for reselling the car after your lease term is up, they need it returned in its original condition. Because of that, lessees aren’t able to customize their vehicle in any way, which can be frustrating for those looking to get branded artwork done for company vehicles.

Financing your vehicle through a business car loan in Scarborough is another effective way to purchase a company car.

What Is Financing?

Financing your vehicle through a business car loan in Scarborough is probably one of the most popular options for business owners. Through this process, the borrower secures a loan with a lender such as a bank, credit union, dealership, or subprime lender. After the borrower offers a sizeable down payment, the lender pays for the remainder of the vehicle. The two then enter an agreement where the borrower agrees to repay the lender a fixed monthly amount over a specified time period. This repayment plan covers the full cost of the vehicle and includes additional interest. Once the borrower is done paying back their loan, they have full ownership of the car.

The Benefits Of Financing For Business Owners

One of the biggest perks of financing is being able to own the vehicle once you’re done repaying the loan. There are also no limitations to that agreement. Unlike leasing, there is no cap on mileage or customization restrictions that the borrower has to adhere to, giving them a lot more freedom to do what they want with their new ride.

The Disadvantages of Financing for Business Owners

Going the financing route may not be for you if you enjoy the luxury of changing your business wheels every couple years. Financing is only really good if okay with making that long-term commitment.

In addition to paying back the business car loan, borrowers need to remember that they’re also responsible for the upkeep of the vehicle which includes regular maintenance. Unlike leasing, these regular check-ups are not covered by your lender. Borrowers will have to cough up the money to cover those costs on top of gas, car insurance payments and more. Before looking into financing, it’s important to budget all your business transportation costs to make sure it’s something you can afford on a consistent basis.

Leasing vs. Finances From A Tax Perspective

Besides understanding the nuts and bolts of leasing and financing from a business perspective, it’s also important to understand it from a tax perspective. The good news is, whether you decide to lease or finance your business vehicle, you can claim both on your taxes.

Pro tip: Apart from lease and finance expenses, it’s important to know that business owners are also able to deduct a number of auto expenses including gas, parking fees, repairs, registration fees and more. So long as it’s business related, it can probably be claimed. For a full list of deductible business expenses, talk to your accountant.

Now in the case of leasing and financing on your taxes, here’s how they compare.

Leasing – you can deduct the auto business percentage of your lease payments. For example, if you use a company vehicle 50% of the time you’re operating your business, you’re able to deduct 50% off your lease payments. The limit you can deduct on monthly basis is $800 plus HST, which adds up to approximately $9,600 a year.

To understand this, let’s assume your annual lease payment is $5000 — that’s approximately $416 monthly. If your business car usage is about 60%, you may be eligible to deduct $3,000 on your taxes that year.

Financing – when you buy a car, what you spend on the cost of your car can be deducted at a rate that’s determined by the CRA. This deduction is called Capital Cost Allowance or most commonly known as depreciation. You can’t do this with leasing because you don’t own the vehicle, which means you’re also not responsible for its depreciation. If you finance in order to buy your vehicle, you’re eligible to deduct the interest paid on the loan at a maximum of $300 a month, an amount determined by the CRA.

If you’re unsure which option is best for you from a tax perspective, be sure to consult your accountant who can breakdown these options for you in greater detail. Based on your business endeavor, they can advise you on which route may be more beneficial for you when tax season arrives.

Which Option Is Right For Me?

Deciding whether you want to lease or finance you business vehicle is a big decision. In hindsight, they’re both really great options but for very opposing reasons.

Depending on where you stand, leasing may be the more exciting option as it gives business owners the option to switch up their car every couple years. Monthly payments are much more affordable which can be appealing to many business owners.

While leasing does come with a number of limitations, it’s a great option if you’re looking for something short term. From a business perspective, leasing is worth looking into if you want to test run the impact having a car will have on your business, without making a full on commitment right away. After testing out the vehicle throughout your lease term, you can make a more educated decision on whether or not you want to make a more long term investment with a business vehicle.

For those that already know they’re in it for the long haul, getting a business car loan in Scarborough is without question the way to go. While monthly car payments may be more pricey, it will all be worth it in the end once you fully repay the loan and own your car.

Even while you’re making monthly payments, borrowers don’t have to adhere to any mileage limitations or worry about whether or not they can do custom upgrades on their vehicle like a branded paint job. Since the car will ultimately be yours in the end, you’re free to do what you want with it so long as you pay back the lender on a consistent basis.

At the end of the day, it all comes down to personal preference and what’s best for your business. When you’re weighing out your options, be sure to evaluate your short and long-term business goals and come up with a monthly car budget you’re comfortable with spending. Once you have that figured out, it will put you in a better position to make this decision. Whichever option you decide to go with, you can be confident that purchasing a company vehicle will mark the start of an exciting new chapter for your business.