Whether to buy or lease a commercial vehicle – this is the biggest question that business owners face. While both options may seem confusing, especially for small businesses, they come with their own set of advantages and disadvantages. Understanding these pros and cons and making an informed financial decision will not only benefit a business financially but also boost its productivity and profitability in the long run. Here’s an in-depth look at the pros and cons of leasing or buying commercial vehicles.
Factors to Consider When Buying or Leasing Commercial Vehicles
There are several factors at play when choosing to either buy or lease commercial vehicles – be it trucks, lorries, vans, or smaller cars. A business must consider factors from an all-round perspective before making a financial investment to avoid a misinformed decision. Some of these factors are mentioned below:
Financial Condition
The decision to lease vs. buy vehicles for a business depends on its financial condition. It may seem that buying a vehicle is the most financially draining option, however, the monthly agreements on the lease can also add up to additional costs over a set period of time. If a business has a stable cash flow and is ready to invest upfront, one may consider buying the vehicle. On the other hand, if the business is working on limited capital, one may want to consider leasing vehicles instead of buying them.
Usage Patterns
If a business plans to use a vehicle for a shorter duration, is fine with compromising on the mileage, and is not yet ready to make a huge financial investment, leasing is the way to go. However, it comes with a handful of disadvantages. On the other hand, if a business plans to use the vehicle for a long duration and is ready to invest a massive upfront cost, buying a commercial vehicle may prove to be more efficient.
Leasing Commercial Vehicles
Leasing commercial vehicles comes off as a great solution if the business lacks the necessary finances to make an upfront purchase. However, leasing may not be efficient in the long run. The pros and cons of leasing commercial vehicles listed below will help understand why.
Pros of Leasing Commercial Vehicles
- Lower Initial Costs: Leasing usually requires a smaller down payment compared to buying. So, businesses with limited upfront capital can be at an advantage as they can lease instead of buying.
- Fixed Monthly Payments: Lease agreements usually have fixed monthly payments, which are comparatively less than the amount required for buying. This allows businesses to manage their budget efficiently while predicting future expenses.
- Tax Advantages: Monthly payments as lease are eligible for tax deductions as they are counted under business expenses. For instance, if a business is paying ₹30,000 per month for leasing a car, this amount can be deducted as a business expense, thereby reducing the taxable income by ₹3,60,000 annually.
- Reduced Maintenance Costs: When a business purchases a commercial vehicle, it is entirely responsible for its maintenance costs. However, many lease agreements include maintenance packages, reducing the burden of repair and maintenance costs.
Cons of Leasing Commercial Vehicles
- Higher long-term costs: While leasing may be affordable and convenient in the short term, it can turn out to be more expensive over a long period of time. This may prove counterproductive for the business, as it contradicts the primary objective of earning profits.
- Mileage limitations: Lease agreements often have a set limit on vehicle mileage. Exceeding this mileage can result in additional costs, thus proving a disadvantage for business owners. Mileage limitations restrict how much a vehicle can travel, limiting the scope of business that it would have achieved, had there been no mileage restrictions.
- Customisation restrictions: Vehicles taken on lease usually come with a list of restrictions on modifications. Thus, a business owner cannot make full use of its branding to customise the vehicle.
Buying Commercial Vehicles
Buying a commercial vehicle may require a heavy upfront investment, however, it is way more efficient in the long run. Here are the pros and cons of buying a commercial vehicle:
Pros of Buying a Commercial Vehicle
- Ownership: The biggest advantage of buying a commercial vehicle is ownership of the same by the business owner. Ownership allows the business to use the vehicle for as long as it wants without having to pay additional fees.
- No mileage restrictions: With ownership, comes the freedom to use the vehicle without having to worry about mileage restrictions. Additional fees that are charged when mileage limits are exceeded, in the case of leased vehicles, are not charged.
- Customisation: Owning the vehicle means that businesses can go creative with their branding and advertising on the vehicle. This is crucial for businesses wanting to advertise their services organically.
- Resale value: Ownership also allows businesses to be flexible with the duration that they own their vehicles for. Once the business doesn’t require the vehicle, it can sell it away to recoup some of its investment.
Cons of Buying a Commercial Vehicle
- Heavy upfront cost and maintenance expenses: Purchasing a commercial vehicle requires a substantial upfront investment. Accumulating such a heavy cost can be a tough task, especially for smaller businesses or when a large fleet of vehicles is to be deployed. The responsibility of timely maintenance and repair also completely falls on the shoulders of the business itself. As the vehicle ages, these costs may keep adding, thus burdening the business’ finances.
- Depreciation: Over time, the resale value of a vehicle keeps decreasing. Moreover, due to ageing, the vehicle may not remain in ideal condition. Both these factors combined will result in depreciation and ultimately affect the resale value of the vehicle.
- Outdated models: New models and upgraded versions of commercial vehicles are released every now and then. Purchasing a particular model of that vehicle means that the business is stuck with the same model for a long period of time. This model is then likely to become outdated. Leased vehicles, on the other hand, can be upgraded to the latest models at the end of the lease agreements.
Summing Up
Both leasing and buying are beneficial in their own ways but also fall short in some places. Leasing offers the benefits of lower upfront costs, predictable monthly payments, and the flexibility to upgrade to newer models regularly. On the contrary, buying vehicles can lead to long-term savings, ownership benefits, and greater customisation options. Businesses must carefully weigh the pros and cons before making an investment as it can affect them in the long run.
FAQs
What is Classified as a Commercial Vehicle?
In general, a vehicle utilised for business purposes to transport passengers or goods is referred to as a commercial vehicle. These can be big trucks or tiny vans, as well as specialised cars like tippers and people carriers.
What is the Biggest Advantage of Buying a Commercial Vehicle?
The biggest advantage of buying a vehicle is ownership, which allows a business to build equity in the asset. The business can also modify the vehicle and use it as deemed fit.
When Should Buying be Preferred over Leasing?
Buying commercial vehicles is preferred when a business plans to use them for an extended period and wants to avoid ongoing lease payments. It also allows for customization to fit specific business needs and provides potential tax advantages through depreciation.
