As the owner of a small business (SME), you may be wondering if you should lease a company car for your business. Discover the six things you should know when leasing a company car as well as pros and cons of buying vs leasing, tax implications and other essential information.
6 Things to know before leasing a car for your business
For many growing businesses in need of a company car, vehicle leasing often proves to be the smartest, safest, and most sensible option. With a lease in place, those businesses are empowered to get on the road and meet the needs of their customers in a quality vehicle that reflects the high standards upon which they're building their reputation. This can all be done without the kind of initial capital investment and long-term complications that come with buying a company car outright.
If you're one of the increasing numbers of business owners considering leasing as the best way forward, here are a few things you need to know first:
1. How long are commercial leases?
Car leases for business generally run between two and three years, though you may find some offers for as little as 12 months or as much as five years.
2. What happens at the end of a car lease?
Once your lease ends, the next steps are up to you. Most business owners simply choose to renew their lease with a new, more up-to-date model, though returning the car is always an option.
If your car's resale value at the end of the lease is different from the 'residual value' figure estimated at the start of it, you may be obligated to cover the difference.
3. What's the difference between resale and residual value?
When you take out a lease on a new vehicle, your finance company will estimate how much that vehicle is likely to be worth once the lease ends. They call this figure the 'Residual Value.'
Any number of things can happen to that car, and the industry as a whole, over the course of your lease, meaning that the actual value of your car ends up being different from the estimated 'residual value.' This actual, end-of-lease value is what we call the 'Resale Value.'
Who is responsible for maintenance costs?
With a standard commercial car lease, the responsibility for repairs and maintenance comes down to you. However, some TFM lease do cover basic essentials such as servicing, vehicle registration, tyres and general maintenance.
Should you damage the car, the cost of repairs will ultimately be something you need to take care of.
What are excess mileage charges?
A car with 20,000 kilometres on the clock in many instances can hold its value more than the than the same model with 40,000 kilometres on the clock. Therefore, when you lease a new vehicle, you agree to use it only for a fixed number of km per year. This is one way that your lease company will aim to keep the final resale value of your leased car as close to the initial estimate as possible.
For you, sticking within your agreed mileage is one way that you can avoid having to cover the difference at the end of the car lease. Anything you do over that amount will be liable to pay an excess mileage charge for.
These charges are calculated by taking the number of kilometres you drove outside of your agreed limit and multiplying it by a fixed cost-per-mile as stipulated in your lease contract.
Typically, excess kilometre rates are charged at under $1, and often under $0.50 per kilometre, though these can soon add up if you drive far beyond your stipulated mile allowance.
Fleet manager duties?
When you work with fleet management specialists like Toyota Fleet Management, they will take the time to get to know your business and its transport needs. Then they will discuss the various options available and help you source the right vehicle at the right cost.
GST and business vehicle leasing
With regard to leasing a car for business tax deductions, when registered for Goods and Services Tax (GST), you may be able to claim GST credits for GST that is included in the monthly lease instalments. If you decide to retain the car at the end of the lease, you may also be able to claim GST credits for any GST on the residual (final) payment. Check with your accountant or tax adviser for how these credits may apply to you.
You can find out more about information via the Australian Taxation Office website.
Pros and cons of leasing a car for business
There are certain advantages that come with leasing a car for your business. As an SME, you will be able to run cars with a set monthly rental payment being paid along with an agreed mileage over a contract period to suit you. This is normally somewhere between 2 – 4 years, and at the end of the lease you can choose to hand the car back to the provider and start again.
Before going ahead with leasing a car for business purposes, it is a good idea to consider both the pros and cons of this option. Let’s take a look at them in more detail:
Pros
- When the lease ends every 2-4 years, you can easily upgrade your vehicle.
- Vehicles involved will be fairly new so may include the manufacturer’s warranty. Some leases can also include repair and maintenance costs.
- Money is not tied up in a depreciating asset.
- Avoid depreciation with fixed-cost motoring. Many small businesses find cash flow tight, particularly in the early days, making considering large bank loans to purchase company cars unappealing. By leasing a car, up-front capital does not have to be provided, and you just pay a set monthly fee. At the end of the contract, the car goes back to the provider who manages the sale.
- Improve cash flow. By leasing your car, money is freed up for other business-related projects.
- Make use of fleet discounts on vehicles. Access discounts on the latest models, so you’re getting the best deal for your business.
Cons
- Once you add up the monthly repayment fees and charges, it may cost as much as if you took out a car loan.
- You may not be able to make alterations to the vehicle.
- As far as finances are concerned, the car will not be owned by the business.
- If for some reason you stop using the car, you may be tied into making payments for the whole of the lease period.
Fleet financing options to consider
TFM provides several funding options for vehicles specifically designed to support small business owners. These are as follows:
- Complete Lease – Bundles the core costs associated with a vehicle lease into one single, monthly payment.
- Maintained Chattel Mortgage – Allows you to purchase your vehicles and enjoy the convenience of a monthly invoice where your core running costs are included with the confidence knowing potential tax benefits built in.
- Novated Leasing – Is the salary packaging arrangement where the employer pays an employee’s car finance and running costs directly from their salary, making it a tax effective way for an employee to get into a new car.
Details about these three options and their benefits for small business owners can be found here or, for further enquiries, get in touch with TFM.
If you are seeking an option that does not fit in with any of these three, then TFM has the following alternative products, suitable for financing and leasing a vehicle:
TFM provides several funding options for vehicles specifically designed to support small business owners. These are as follows:
- Operating lease – allows business owners to fund assets with the option to hand back the vehicle when the lease ends.
- Finance lease – financing with a known monthly cost and no capital outlay, plus the option to hand back the vehicle when the lease ends.
Summary
Whether you decide to lease or buy a car for your business, consider the following tips:
✔Always deal with a reputable provider, such as Toyota Fleet Management, who will provide you with the best options.
✔ Take your time and shop around – your provider should be able to provide you with access to the best deals with the lowest rates of interest and superior collection of vehicles, and
✔ Before proceeding, work out how much you want to spend each month.
Should you require further information or if you would like to know more about TFM’s small business fleet services, do get in touch with Toyota Fleet Management Services today or call 1300 888 870.
Disclaimer
The information provided by Toyota Fleet Management, a division of Toyota Finance Australia Limited ABN 48 002 435 181, AFSL and Australian Credit Licence 392536, is of a general nature and for your information only. Nothing in this article constitutes or should be considered to constitute legal, taxation or financial advice. Before making a decision about any product or service described, we recommend that you seek independent professional advice such as from your accountant, taxation or financial adviser or lawyer, who can advise you about your personal circumstances and what would be suitable for you.