The pros and cons of leasing or buying a business vehicle

The pros and cons of leasing or buying a business vehicle

Story sponsored by Savvy.

When you're trying to run a small business, a motor vehicle - or better yet a fleet of them - can be a major expense.

They're also a big investment that can have a serious impact on your monthly budget and bottom line. So, are you better off buying a vehicle or leasing it?

The reality is there is no easy answer to this question. There's just a list of pros and cons. Depending upon your individual circumstances, the "right decision" may vary. But the better informed you are, the more likely you are to make a savvy choice.

Here are a few pros and cons of buying vs leasing a business vehicle.

Pros of leasing a vehicle

Let's start with the positives. Leasing a vehicle can be good for tax purposes. One of the biggest upsides is that you can claim the lease fees as a business expense. Of course there are rules surrounding this - and you might not be able to claim the entire amount if you also use it for personal reasons - but it can help to bring some of your overall tax burden down.

You might also be able to claim a GST credit on part of the repayments. (More information on the rules is available here.)

On top of that, you can easily upgrade your vehicle every two or three years when your lease expires and you generally need less money upfront. That means you can have a nicer car every couple of years without having to constantly save for it.

Another advantage of a lease is that it MAY save you money on upkeep. As the vehicles you lease tend to be newer, there's a chance they might still be covered by a manufacturer's warranty.

Also, depending upon your leasing agreement, you might be covered for some of the mechanical repair costs if required. It is always worth asking about this before signing.

The cons of leasing a vehicle

As previously stated, it is worth reading your leasing agreement closely and doing the sums before signing because it can end up costing just as much as getting a car loan when you take into account the monthly repayments, fees and charges.

You also won't be able to make alterations to the vehicle or claim the car as an asset for other borrowing or financial purposes. It is essentially just another business expense.

Additionally, you might have trouble getting approval for a lease if you have a bad credit history and - even if you are successful - there may be stringent contractual obligations.

For example, you may be obliged to continue making payments for the entire lease period, even if you stop using the vehicle and want to return it early. Some contracts may also include early termination fees.

The pros of buying a vehicle

One of the biggest pros of buying a vehicle is that you can take advantage of the government's Instant Asset Write-Off scheme, the threshold for which recently increased substantially.

There are obviously rules around this (which can be viewed here), but essentially if you turn over less than $500million per year, you can write off the full purchase cost any asset - worth less than $150,000 - that you purchase between now and December 31, 2020.

Additionally, if you use a motor vehicle solely for business purposes and you're registered for GST, you're generally entitled to claim a credit for the GST included in the price of the vehicle. There are rules concerning luxury car purchases, leased vehicles and purchasing second-hand, which can be found here.

Another pro of buying a vehicle is - as previously stated - that the repayments on a lease and car loan can be similar. The BIG DIFFERENCE IS, when you've made your final repayment on a car loan, you end up owning the car outright.

When you own a vehicle, you're free to modify it any ways you need to help make it more efficient for your business. You can also use it as an asset when applying for loans.

The cons of buying a vehicle

When you own a vehicle you are solely responsible for its maintenance and upkeep. If you have a fleet of vehicles this can be expensive and there is no chance of a third party chipping in to cover some or any of these costs.

Buying also usually requires a larger upfront payment than leasing does and if you use the vehicle you're buying as security for the loan, your financier can repossess it if you fail to make the repayments.

While an obvious advantage of buying a vehicle is that you own it, it is worth remembering that it is a depreciating asset and that it will become less valuable over time.

It is also harder to "upgrade" a vehicle if you own it. It literally means you need to sell it and buy another one, which will mean more money upfront.

So there you have it...

When it comes to purchasing or leasing a vehicle it really comes down to your personal circumstances. If you are seriously considering either option, you should speak to your accountant or trusted financial advisor.

But as a general rule though, it is worth remembering the importance of shopping around for the best possible deal on both the vehicle and finance.

You should also do the sums to makes sure you can afford the lease or repayments before you sign anything and always make sure you're dealing with a reputable financier.

If you keep these things in mind, you're more likely to make a savvy business decision.