July 20, 2023 / 5 minute read
When you’re in the market to acquire new vehicles for your business (cars, trucks, or vans), you’re likely going to be faced with the question that’s on many people’s minds — is it better to lease or buy?
Many businesses choose to finance their vehicles because they’ve heard rumours about restrictions associated with some types of leases. But what you may not know is that there are two types of vehicle leases — commercial and retail, and commercial leases offer far greater flexibility, fewer restrictions, and real benefits for businesses.
In this blog, we’ll evaluate the lease or buy question by bringing focus to the benefits of commercial leases.
Is it better to buy or lease a car for business in Canada?
As with most business decisions, the choice to lease or buy vehicles will depend on your unique circumstances. But the fact is, commercial leasing provides many critical advantages.
It frees up operating capital
Commercial leases allow you to better manage your cash flow so you can secure loans for other aspects of your business. On the other hand, when you purchase vehicles, your borrowing ability is reduced which can have a negative impact on cash flow.
You can run a newer fleet of vehicles, for less money
When proper maintenance and vehicle cycling are implemented, the cost of a lease can make a real difference to your bottom line. The simple fact is, newer vehicles require less maintenance. Purchasing vehicles still allows for cycling whenever you want, however it will cost you more to operate them since monthly payments are higher for financing than for leasing.
You can negotiate flexible lease terms
Flexible lease terms mean a regular and consistent flow of newer vehicles to your fleet. Traditional leases are typically structured for 3-4 years, but commercial lease plans provide added flexibility.
Commercial leases offer significant tax benefits
When you lease your vehicles, you only borrow on the contracted term for the lease, which results in lower monthly payments. This means you can deduct the business percentage of your entire lease payment. The deduction limit on the monthly lease payment is $800 per month plus HST, which works out to a maximum of $9,600 in expenses that are tax-deductible annually.
When you finance your vehicles, you borrow the complete value of the vehicle, resulting in higher monthly payments. Financing also provides tax deductions, but the amounts are lower as compared to leasing as deductions are calculated based only on the interest portion that you pay on your financing.
You pay less GST
With a vehicle lease, you only pay GST on the value of the lease. With financing, you pay GST on the full value of the vehicle. This can make a major difference in the amount of GST you pay for your fleet vehicles.
Comparing the different types of leases
It’s important to note that when leasing a car for business in Canada, you have access to different types of leases. While many businesses are familiar with retail leases, which are quite restrictive, you might not be aware there is a more flexible alternative known as commercial leases.
How is a commercial lease different from a retail lease?
A commercial lease (also called an open-end lease) has several key differences from a retail lease (also called a closed-end lease).
With a closed-end retail lease, the lease provider is responsible for any potential gain or loss at the end of the fixed term, which can be a benefit, especially if your organization is very risk-averse.
However, there are downsides to retail leases for businesses. For example, there are limits on the number of kilometres you can travel. This always adds an extra layer of complexity to your business operations as you’ll need to make sure your drivers don’t surpass those limits, or you’ll have to pay extra. Consider the data. Fleet drivers drive an average of 32,000+ kilometres per year, while retail leases are typically established at 20,000 to 24,000 kilometres per year.
It’s also important to note that retail lease vehicles also come with a wear-and-tear policy and you will need to pay extra for any wear and tear that falls outside of the policy parameters. You won’t be able to capitalize on any gains realized at the end of the lease term.
Alternatively, an open-ended commercial lease combines the flexibility of ownership with the cash flow and tax advantages of retail leasing. Commercial leases ensure your business accepts any potential financial gain, but may also be subject to any liability or potential loss at the end of the term.
But it’s important to remember that as long as your vehicle is well maintained and you meet the contractual obligations of the lease, in the majority of cases you shouldn’t see any losses at the end of the term.
Top benefits of commercial leases for businesses
- There are no maximum kilometres you can travel, so you know your fleet operations won’t be compromised.
- There is no wear-and-tear policy, which is very beneficial for businesses since your fleet vehicles will generally be driven more and accumulate more wear and tear than consumer vehicles.
- No fixed terms, which means commercial leases offer more flexibility (the lease term is a minimum of one year, and the depreciation term is set for four years), but you can take the vehicle off-lease anytime before or after that - or even buy out the lease when you want.
How can a fleet management company help?
Choosing commercial leases for your vehicles through a fleet management company has several benefits. An FMC will help you find the right vehicle for the job, taking into account your company needs, any upfitting requirements, and increasing your chances of getting the highest returns at the end of your lease. Here at Foss National, we help our clients with:
- Vehicle monitoring (customers can view and monitor the status of each vehicle through a secure fleet manager portal).
- Vehicle cycling (we provide strategic guidance on vehicle cycling best practices, removing your vehicles from service at the optimal point before maintenance costs get too high, and while depreciation is still low).
- Transparent cost structure (we’ll help you understand exactly what it’s costing you to operate your vehicles) and we provide access to fully transparent pricing on your vehicles, so any concessions we receive are passed to our customers.
- Increased probability of a gain on sale (we work to ensure there’s always a gain for you when it comes time to re-market the vehicle, and of course, the gain is yours).
- Single monthly invoice for all vehicles (if you have a multi-branded fleet, for example, if you have a mix of Ford, RAM, and GMC, we consolidate the data for your entire fleet and provide you with a single monthly invoice for all of your vehicle leases.
When it comes to acquiring vehicles for your business, there’s much more to consider than just the upfront costs. When examining the lease vs finance question, remember that cash flow, tax implications, vehicle maintenance costs, and vehicle depreciation all have an impact on your business operations and your fleet’s total cost of ownership.
Commercial leases are a tool to help you optimize all of these complexities while providing you with all the benefits of ownership. Partnering with a fleet management company for your commercial vehicle leases gives you access to fleet specialists who provide strategic guidance on how to best acquire and manage your vehicles.
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Get to Know the Author
Basil is a seasoned, results-oriented executive possessing North American and European experience. He has held senior management roles for over 10 years, gaining experience in sales, marketing, business development and fleet operations.
As Managing Director at Foss, he is passionate about changing the way we look at fleet management, mobility, green initiatives, and automotive trends. He takes great pleasure in working closely with the Foss team and helps those around him to grow and evolve within the company.
Basil maintains the same enthusiasm and energy in his personal life. He spends as much time as possible with his wife and two young boys. Any other spare time he finds he is out on his bike, golfing, traveling, and exploring.Meet our team