Leasing a car or truck under your business name, instead of through a personal credit profile, is gaining in popularity among companies classified as a small business.
Some business owners like the idea of having newer cars to drive to meetings and events or for other much-needed business purposes. Others don’t like putting so much wear and tear on their personal vehicles and have deemed the IRS’ standard mileage deduction to not be as rewarding as deducting straight expenses.
Still, others are hoping to expand a sales force or add more field reps and want to keep a consistently branded theme and record of reliability in their client dealings.
Whatever your reason for looking into a leased vehicle, it’s important to get the facts so that you don’t overpay, or – worse yet – get penalized for driving the vehicle in a way that’s counter to the lease agreement. Here are some basic steps to getting the new vehicle of your dreams at a price you can afford.
How to Lease a Car Through Your Business in 5 Steps
1. Research how you’ll use the vehicle.
Not every business owner needs to lease a company car through their business. Following the IRS guidelines for claiming vehicle expenses, certain sole proprietors and partnerships could just as easily lease a car through a personal account and either write off qualified business costs or take a standard mileage rate and tax deductions.
If you have a more complicated business structure, drive a car 100% for business, or want to own a fleet of business vehicles, it makes sense to separate out the lease cost through a business lease as a business expense (Note that tax rules change significantly if you have a fleet of five or more vehicles in your business or if your vehicle is used for hire – such as driving for Lyft or Uber).
You should also look at how long you expect to own a car. If you like the idea of keeping a car for a long time (ten years or longer) so that you can take advantage of lower taxes, licensing, and insurance down the line, leasing likely won’t be for you.
Leasing is an ideal choice for those who want a new car every few years, need it to support business needs, don’t have a lot of liquid cash on hand for a large down payment, and aren’t concerned with the sentimental value of car ownership.
2. Shop around
While most consumers think of a dealership as the first stop on their quest for the right car, don’t limit yourself to just these formal showrooms. The National Vehicle Leasing Association (NVLA) has a free membership site with access to leasing companies around the country. Signing up gets you access to both dealers and private leasers that may have just the car at a price you can appreciate.
Some banks and auto manufacturers have leasing programs, as well. If you drive your new car as part of a ride-sharing service, those companies have leasing programs specifically for their drivers.
3. Know the costs involved
Leasing can be an affordable way to get a newer-model vehicle into your fleet, but it doesn’t have the simplest payment structure. Compared to buying a car outright, which has just a few factors to consider, leasing can be a maze of options, all with varying terms, prices, and penalties. According to AllBusiness.com, potential leasers need to know these important terms before you sign any contract:
- Capitalized cost – or “cap cost” is the price of the lease. This should be much less than the MSRP when you’re done negotiating.
- Cap cost reductions are discounts that can help you lower that capitalized cost, such as rebates from the factory, the value of a trade-in vehicle, or friends and family discounts.
- Residual value will be what your car is worth at the end of the lease term, provided you don’t get out early. You and the dealer will agree on the value at the end of the lease, but you should aim for this to be as low as possible if you want to buy the car at the end of the lease outright. If you have no desire to buy the car, you can focus on a higher residual value, which will leave you with smaller monthly payments.
- The interest rate is also known as the “money factor” in a lease agreement. Look for this number to be a value that, when multiplied by 2,400 gets you to your annual APR. (A money factor of .00028 would equal an APR of 6.72 percent.)
In addition to the monthly lease payments, you should expect to budget for any down payment, sales tax/title/licensing fees, and any additional local or municipal taxes or fees for purchasing a new vehicle.
4. Work out the terms.
Now comes the hard part: getting the deal you want. If you have picked out a car, know what the MSRP is, and have negotiated down the cap cost to a price that gives you comfy monthly payments and a low down payment, that may seem all there is to do. Smart buyers should also consider whether they want an open or closed lease.
What’s the difference? Open lease contracts are typical for business vehicle leases, and the buyer is committed to paying any difference between the residual value and the actual resale value. If you drive the car too much or damage it, the dealer can come to you to get the money they would have gotten if they sold it at the agreed upon residual value.
Closed leases, on the other hand, don’t consider the residual value at the end of the lease, but rather any mileage beyond the original agreement and payment for damages. If you keep within your mileage terms and don’t dent the fender, you can walk away from a closed lease without any surprise costs in the end.
Keep in mind that business leases are generally open because businesses put a lot more miles on their vehicles than consumer do. It may be cheaper in the long run to pay a difference in value than a mileage overage.
5. Use business credit or a personal guarantee
If your business has optimized its business credit and has a great credit score, the vehicle can be placed solely in the business’s name. However, if you have yet to build your business credit profile and don’t qualify for a favorable lease payment plan, you may have to personally guarantee the vehicle. This means that even if your business is unable to make the payments, you would still be personally responsible for doing so. Newly established businesses may have to personally guarantee a vehicle, so it’s best to work with the financing department to see what the best options are for you.
Is it better to lease or buy a car under a business?
Identifying the differences between buying or leasing a car under your business creates a better understanding of your options and how they best serve you and your business. One of the main differences between them is that buying grants the business complete ownership of the vehicle which means you wouldn’t have to worry about mileage limits or wanting to customize the vehicle. On the other hand, as a lessee, your business can have lower monthly payments and other perks that are tailored to your business needs.
Here are a few other differences to consider:
|Leasing a car||Buying a car|
|Mileage and part of the lease payment may be tax-deductible||Depreciation and mileage are tax-deductible|
|Lower monthly payments and no down payment||Higher monthly and down payments|
|Customization such as marketing ad paint is not allowed||Customization is allowed|
|Penalties for higher mileage usage||No penalties on mileage|
|Typically comes with a warranty and maintenance included in your monthly payments along with minimal wear and tear||Maintenance expenses are covered solely by the owner|
Is Leasing for You?
Nav assists entrepreneurs and self-employed individuals with the best possible loan options through the marketplace. Leases can be tricky, and many business professionals put off committing to one because of all the nuances to the contracts and pricing. If you do your research, however, take time, and compare pricing, you can come out of a leasing office with a new car that projects professionalism, gives you reliability, and offers some flexibility in your transportation budget.
If freeing up cash is your aim, there is no comparison to what leasing options are available to small business owners.