By Andrew Hogsden, Senior Consultant, Lex Autolease.

One of the most important questions for any business that operates a fleet is whether they should lease or buy their vehicles. It’s a crucial choice and one that requires careful consideration as the wrong decision can end up costing companies a significant sum of money.

The starting point for businesses looking to buy rather than lease is finding the money from their existing capital to pay for the vehicle up front. This in itself can present challenges, as outright purchase requires a considerable outlay that can put pressure on cash flow resources and locks up capital that could be used more productively elsewhere in a business.

Using this funding method the business also takes on all the risks of ownership such as depreciation, repairs, servicing and maintenance costs. In particular businesses that prefer to buy vehicles rather than lease them need to closely monitor residual values and may end up out of pocked if values deteriorate more sharply than expected.

The flip side is that buying a car or van can give a business greater control over when and how they sell the vehicle and how it is used. For example most leases will specify an annual mileage limit. For those businesses looking to keep a vehicle beyond a three or four year period or who need a high mileage workhorse, then outright purchase may be the best option.

Leasing is the most common way of acquiring fleet vehicles. There are broadly two types of leasing: a finance lease where the business takes the residual value risk and an operating lease, where the leasing company takes the risk. Operating leasing such as contract hire are the simplest and most popular form of leasing.

Businesses that select this funding method can realise a number of benefits. Leasing is an easier way of sourcing vehicles and safeguards the fleet from residual value fluctuations. The company is not saddled with a depreciating asset and all related costs such as servicing and maintenance can be fixed and budgeted for in advance.

Leasing can also prove to be a more tax efficient choice, as certain types of businesses can potentially clam back 100% of VAT if the vehicle is used solely for business purposes.

Regardless of which funding choice they opt for, business owners should resist the temptation to select a new car or van until they have worked out the whole life cost of a particular vehicle.

Understanding whole life cost requires analysing the expenditure required throughout the vehicle’s life, not just the initial outlay and includes factors such as fuel costs, National Insurance contributions, capital allowances, maintenance costs and depreciation. Once all of these factors have been evaluated business owners will be in a position to make the most efficient and cost effective fleet choices.

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