Exploring the Lease/Purchase Equation

Business Insights

Fleet managers will tell you - indeed anyone in the fleet management sector will tell you - that rocketing fuel prices, and the rising costs of insurance are among the biggest ongoing challenges their businesses have faced in recent times.

But, not wishing to downgrade those worries for the moment, they come with the assumption that a company already has a vehicle ready and waiting to be fueled and insured.

Acquiring said vehicle in the first place is a matter that requires a whole heap more finance, and time spent carefully considering which financial road to take, for every option will have an affect on operating costs, taxes paid and profits made.

It basically boils down to whether a firm purchases its fleet of vehicles or leases them, and, of course, there are advantages and disadvantages to both.

Purchase, usually hire purchase, enables the cost of the asset - vehicle - to be spread over a specified time in a series of agreed monthly payments rather than making one large capital outlay.

At the end of that time the purchaser, who has had the ability to claim capital allowances on the asset - has outright ownership. Any interest charges can be offset against profits for taxation.

However, the potential purchaser is also responsible for all the maintenance and repair costs - not forgetting depreciation.

There are probably few companies that can afford the capital outlay for outright purchase, even for larger businesses the cost of buying a fleet of vehicles is probably unrealistic and many in the sector are turning to leasing.

Not only does it mean vehicle costs can be fixed, it allows control over important budgets and saves on the initial costs of buying outright.

In a nutshell, leasing is essentially a contract between a funder and a customer that gives the customer the use of the asset in return for a rental payment over an agreed time period.

It allows for the full use of the equipment without the responsibility of ownership but, once the lease period is over the option exists for the return of the asset, or for its use to continue through a secondary rental agreement.

Should that asset no longer be required, the leasing company will arrange for its sale to a third party, with the lessee keeping a portion of the takings.

Pros and cons to weigh up with this option include

  • Access to a high standard of equipment that might not otherwise have been affordable.
  • Interest rates on monthly installments are usually fixed.
  • A less risky alternative to a secured bank loan - if the payments cannot be made, the asset will be lost but not, for example, the home.
  • The agreement cannot be cancelled as long as regular repayments for the period of the lease are maintained.
  • Leasing and asset finance options are widely available, with a huge range of companies out there offering advice and a wide range of packages.

Disadvantages include:

  • Capital allowances on a leased asset cannot be claimed if the lease period is less than five years - or even seven in some cases.
  • It can be more expensive than buying the asset outright.
  • Some long-term contracts can be difficult to cancel early.
  • A deposit or some advance payments may be required.

Should the agreement be for finance leasing, the lessee is responsible for maintenance costs however, with an operating lease, the asset finance company is liable, meaning the lessee's business avoids any unexpected costs.

On the other hand, an operating lease does not guarantee that the lessor will get back all, or substantially all, of the cost of the asset plus a commercial rate of interest.

Often an asset may be leased several times throughout its lifetime which can mean that at the end of the term of the lease the lessor will be relying on the value of the leased asset to ensure an overall profit.

So, lease or purchase? As ever it’s up to the individual to decide what’s best for their business and its circumstances.

However, according to Julian Rose, Head of Asset Finance at the Finance & Leasing Association, there has been strong growth in the use of leasing and hire purchase for fleets and indeed all commercial vehicles over the past few years.

Regardless of how they are paid for, the cost of financing a company’s fleet of vehicles is a major expense to be dealt with.

Therefore it makes sense to do your homework to ensure you have a real understanding of the different options available when it comes to paying for those vehicles.