Operating lease or finance lease?Finance
How do you know if an operating lease is better than a finance lease when it comes to securing cars for your business’s vehicle fleet?
There are benefits with both operating and finance leases and one may work better than the other for you. The right choice will depend on a variety of factors.
An operating lease works in a similar way to a rental agreement. You only pay for use of the vehicle and enjoy a number of advantages that may not be available if you purchase or obtain your fleet via a finance lease:
- It can free up capital for other business needs that would otherwise be tied up in asset ownership.
- This provides a bigger return on your investments because the working capital is maintained in the business.
- Tax benefits may be available, from this type of lease, as the rental price is tax deductible where the cars are used to generate taxable income.
- Vehicles are returned at the end of the lease — there are no resale value risks when the lease runs out.
- It makes budgeting for vehicle expenses easier, as you only have to allow for a pre-agreed cost – there are no hidden maintenance issues to deal with.
Under a finance lease, your vehicles are purchased by the lessor on behalf of the lessee, your business. This is closer to ownership of the vehicles but still allows the cost of vehicles to be spread across time rather than incurred when the vehicles are purchased.
How does it work? You pay monthly instalments, or finance payments, that go towards the cost of the vehicles.
Once the term of the lease is up you have some options:
- You can purchase the vehicle or vehicles with a final payment determined by the residual value of the vehicles.
- You can re-finance the residual value of the vehicles and continue to lease that particular model.
- Or you can trade in the vehicle for a new model and continue leasing.
This lease can be good for cash flow in that it might require a low initial outlay by way of low deposit terms. Indeed, in some cases you may not be required to pay a deposit at all.
Your payments may be completely tax deductible, but this depends on the tax status and circumstances of your business.
In many cases the option to purchase the car at the end of a finance lease is attractive and this may be an incentive to choose this style of leasing over another.
Still not sure? Ask an expert. LeasePlan is happy to compare some numbers for you and help you make a choice. Ask us how.
You’ll also find more information about vehicle management on our website.