Leasing of corporate vehicles ranks among the most favored financing methods within fleets. It not only preserves a company’s liquidity but also presents tax advantages. However, how does vehicle leasing operate, and what distinctions exist among contract types? In this post, we delve into the concept, providing you with a comprehensive understanding, and offer tips for commercial leasing in your fleet.
Table of Contents
- What Does Company Car Leasing Entail?
- What Are the Benefits of Business Car Leasing?
- What Are the Drawbacks of Commercial Leasing?
- How Does Software Aid in the Leasing of Corporate Vehicles?
- What Types of Commercial Leasing Agreements Exist?
- Company Car Leasing vs. Car Subscription
- What Costs are Associated with Leasing Company Vehicles?
- Common Pitfalls in Company Car Leasing and Strategies for Avoiding Them
- Key Considerations When Finalizing a Leasing Agreement
- What to Be Mindful of When Returning a Leased Vehicle
- Frequently Asked Questions About Business Car Leasing
What Does Company Car Leasing Entail?
Company car leasing is a form of financing in which a business rents vehicles from a leasing provider for a predetermined period and, in return, makes regular lease payments. Unlike purchasing a vehicle, when a company leases, it does not have ownership rights over the vehicles, as they remain with the leasing provider.
Leasing enables a company to effortlessly expand or update its fleet without the need for substantial investments. There are various types of leasing agreements, including mileage-based leasing and residual value leasing, which can be selected based on the company’s specific needs. At the conclusion of the leasing contract, the vehicle can be returned, the contract can be extended, or, if desired, the vehicle may be purchased.
What Are the Benefits of Business Car Leasing?
As previously mentioned, corporate car leasing ranks among the most favored financing options for businesses, owing to the following advantages:
- Financial Predictability with Monthly Lease Payments: Unlike the substantial initial investments required when purchasing vehicles, leasing entails regular, predictable lease payments. This enhances cost predictability for the lease term, safeguarding liquidity and increasing financial flexibility. The remaining capital can be allocated for other business purposes.
- Flexible Lease Terms: Leasing agreements can be tailored to various durations, typically ranging from 24 to 48 months, although 12 or 60-month terms are also possible. In the case of mileage-based leasing, which we will discuss later in the article, the mileage limit can be customized. All of these factors influence the monthly lease rate.
- Tax Advantages: Companies can deduct monthly lease payments as business expenses, reducing their tax liability. Furthermore, a leased vehicle does not burden the company’s equity ratio since it is not recorded on the balance sheet but only in the income statement.
- Access to Current Vehicle Models: Leasing allows a company to regularly update and maintain its vehicle fleet with the latest models featuring innovative technologies. At the end of the lease agreement, the vehicle is simply returned and exchanged for a newer, more efficient model with advanced technologies. These models typically have lower fuel consumption and higher environmental standards than their predecessors. This enables businesses to stay in step with current technological advancements and provide employees with advanced and reliable vehicles.
- Streamlined Administration: Business car leasing can reduce fleet management and administrative efforts. Leasing providers often handle vehicle registration and insurance, and many offer the option to secure a maintenance contract. Such contracts cover all costs associated with inspections and wear and tear, minimizing the risk of repairs to a minimum.
What Are the Drawbacks of Commercial Leasing?
In addition to all the advantages, businesses should also consider the potential drawbacks of commercial leasing before entering into a contract. These include:
- No Ownership Rights: Through leasing, companies do not acquire ownership of the vehicle. The vehicle remains in the possession of the leasing provider throughout the entire contract duration and after its return.
- Difficult Early Termination: Typically, terminating a leasing contract prematurely is not permissible. If a significant reason exists, and the lessor approves, there is the possibility of an extraordinary termination or a cancellation agreement. However, this option results in substantial costs for the lessee, comprising outstanding lease payments and the vehicle’s residual value. In some cases, the leasing contract can be transferred to another lessee, but this process also incurs expenses and requires lessor consent.
- Vehicle Condition Upon Return: At the outset of the leasing contract, it is important to establish which defects are considered normal wear and tear and which are deemed excessive wear or damage. If damages exceeding normal wear and tear are identified upon return, the lessee may be billed for repair costs. In addition to regular maintenance, any damages should be addressed before returning the leased vehicle.
- Limited Modifications: Since ownership rights rest with the lessor, making
modifications or adjustments to the leased vehicle can be challenging. While applying decals or branding, such as a company logo, is generally acceptable, other alterations necessitate lessor consent. Moreover, these modifications often need to be reversed at the end of the leasing period.
How does software support the leasing of company vehicles?
The use of software solutions to support the vehicle leasing process enables fleet managers to digitize and optimize the entire leasing workflow. Fleet management software assists in cost tracking, compliance with deadlines, and informed decision-making. The automation of tasks associated with business car leasing saves time and resources.
- Proposal Management: With the help of software, fleet managers can review and compare offers from different leasing providers. This allows them to quickly and easily determine the best conditions and prices.
- Contract and Document Management: Fleet management software aids in the management of leasing agreements and all relevant documents. Information such as contract duration, mileage limits, monthly rates, or insurance documents is centrally recorded and monitored.
- Cost Control: Fleet managers can track and analyze monthly leasing rates, insurance costs, maintenance expenses, fuel consumption, and other expenditures with a digital solution.
- Reminder Alerts: Fleet management software provides reminders for important dates and deadlines related to vehicle leasing, such as contract extensions, mileage restrictions, or maintenance intervals.
- Reporting and Analysis: By generating reports and analyses, fleet managers can assess key metrics like leasing costs per vehicle, overall costs per kilometer, or contract durations. This greatly facilitates the comparison between contractually agreed-upon miles and actual mileage driven.
Managing Vehicles Digitally
Handle all tasks related to your vehicles and receive reminders for important dates, such as the end of lease contracts.
What types of commercial leasing agreements are available?
In general, there are two types of leasing: mileage leasing and residual value leasing. But what are the differences?
Mileage Leasing
In mileage leasing, the monthly lease payments are calculated based on a predetermined mileage limit. This means that the lessee agrees in advance with the lessor on a specific number of kilometers they are allowed to drive with the vehicle during the lease term. The maximum allowable mileage is then specified in the leasing contract. The rule of thumb is that the lower the annual mileage, the lower the monthly lease payments.
Excess and deficit kilometers are treated as follows: If the agreed-upon mileage limit is exceeded, additional charges are incurred for the excess kilometers driven. These costs typically range from a few cents per kilometer, usually between 5 to 15 cents. Some leasing companies offer a grace allowance for kilometers that can be driven over the limit without incurring additional charges. If the number of kilometers driven at the end of the lease term is lower than initially agreed upon, the lessee receives a refund for the deficit kilometers.
During the lease term, it is the responsibility of the lessee to monitor the driven kilometers and ensure they stay within the agreed-upon mileage limit. Vehicles with mileage deficits should be assigned longer trips, while those with excess kilometers should be used for shorter routes. Prior to entering into the leasing contract, fleet managers should estimate the expected mileage as accurately as possible.
Residual Value Leasing
In residual value leasing, the lessee pays monthly lease payments during the contract period based on the difference between the vehicle’s initial purchase price and the expected residual value. If, at the end of the lease term, the lessee decides to purchase the vehicle, they pay the predetermined residual value. The residual value is agreed upon between the lessor and the lessee at the time of contract inception.
Residual value leasing often yields lower monthly payments, making it an appealing option. However, it comes with a significant drawback: the lessee bears the risk associated with the residual value. If the actual market value of the vehicle at the end of the lease term is lower than the predetermined residual value, the lessee is responsible for covering the difference. This can become costly as factors such as developments in the used car market, economic conditions, and the handling of damages and defects make this calculation challenging.
Company Car Leasing vs. Car Subscription
Duration, predictable rates, and a wide selection of different models are making car subscriptions increasingly appealing for many fleets. But where do the differences lie?
In contrast to leasing, car subscriptions typically offer shorter contract durations and greater flexibility, as the vehicle can be changed more frequently depending on the subscription type. Some providers offer contract terms starting as short as one month. While a leasing agreement may incur additional costs for taxes and insurance, these expenses are already covered within the monthly subscription rate. However, this can result in higher monthly costs.
Company car leasing is advantageous if you:
- Need the vehicle for an extended period.
- Prefer a longer commitment to a specific model and do not plan to change vehicles during the contract term.
- Prefer lower rates and are willing to handle vehicle registration, insurance, and maintenance.
A car subscription is beneficial if you
Only require the vehicle for a short period.
Wish to remain flexible and value the option to terminate the subscription.
Want to test new vehicle models and types initially.
Subscribe to a company car?
With Fleethouse and FINN, you can subscribe to your company cars within seconds. No hidden costs and starting from just one month of duration.
"What costs are associated with leasing company vehicles?
- Lease Payments: These are the primary costs associated with vehicle leasing. They are based on factors such as the vehicle price, contract duration, mileage limit, and the expected residual value of the vehicle.
- Down Payment: Some leasing contracts may require a down payment. The amount varies from one leasing company to another and depends, among other things, on the vehicle price and individual agreements with the lessor.
- Auto Insurance: Typically, the lessee is responsible for the auto insurance of the leased vehicle. The cost of insurance depends on various individual factors, including the no-claims bonus class, vehicle model, or the insurance company.
- Maintenance and Repairs: During the lease term, the vehicle must be properly maintained. Regular maintenance is usually the responsibility of the lessee, including inspections, oil changes, tire replacements, and other routine maintenance tasks. Increasingly, leasing companies offer full-service leasing options that include costs for inspections, tire changes, and wear and tear repairs.
- Repairs: If the vehicle sustains damage beyond normal wear and tear, the lessee is responsible for the repair costs. This includes repairs resulting from accidents, damages, or improper use of the vehicle.
- Additional Fees: In some cases, additional fees may apply, such as early contract termination or excess mileage charges. These fees vary depending on the lessor and the individual contract conditions.
Common Mistakes in Company Car Leasing and How to Avoid Them
When leasing company cars, there are some pitfalls to be aware of to ensure a smooth process both during the contract term and upon return
Mistake 1: Failure to Analyze Individual Requirements
A common mistake is entering into a lease agreement without a thorough analysis of the individual requirements and needs of the fleet. Before finalizing a leasing contract, it is essential to assess and evaluate vehicle usage, mileage requirements, and vehicle models. This way, you can ensure that the lease agreement aligns precisely with your needs.
Mistake 2: Not Comparing Offers
Often, fleet managers fail to allocate sufficient time to compare various leasing offers. Different providers, however, offer varying terms and prices. Therefore, it is essential to take the time to compare different offers and identify the best terms and prices for your fleet. Consider not only the monthly rates but also other factors such as contract duration, mileage limits, and additional services
Mistake 3: Inadequate Contract Review
Another mistake is failing to carefully read and review the lease agreement. Contract details such as the duration, monthly payments, mileage limit, insurance, maintenance, and potential fees should be thoroughly examined to avoid unpleasant surprises. Take the time to thoroughly review the contract and address any outstanding questions to your satisfaction. If necessary, you may also consider consulting a legal expert.
Error 4: Exceeding the mileage limit
A common source of error, which is also associated with additional costs, is exceeding the agreed-upon mileage limit. If the actual mileage surpasses what was contractually agreed upon, extra charges for excess mileage may apply. Therefore, it is advisable to assess your annual mileage as accurately and realistically as possible, and select an appropriate mileage limit in the contract accordingly.
Mistake 5: Irregular or No Maintenance
rregular or neglected maintenance of the leased vehicle is also among the mistakes that should be avoided, as it can lead to additional costs or limitations during the return process. Therefore, ensure that you have regular maintenance performed in accordance with the manufacturer’s recommendations and properly document it.
What steps should be considered when entering into a lease agreement?
When entering into a lease agreement, consider the following steps:
- Needs Analysis: Start by assessing the fleet requirements and determining the type of vehicle you need. Consider factors such as vehicle type, size, features, and budget. Additionally, evaluate which type of leasing – whether mileage-based or residual value leasing – is suitable for your needs.
- Research and Get Quotes: Compare various leasing providers and obtain multiple quotes. Pay attention not only to the monthly payments but also to contract terms, mileage limits, insurance options, and potential additional services.
- Contract Negotiation: Once you’ve selected a leasing provider and a vehicle, negotiate the contract terms such as the duration, monthly payments, and mileage limit. Ensure that all agreements are documented in writing.
- Credit Check: Typically, the leasing provider conducts a credit check to assess your creditworthiness. Therefore, ensure that your company’s financial situation meets the leasing provider’s requirements.
- Contract Signing: After successful negotiations and a credit check, you can sign the lease agreement. Carefully read through the contract and ensure that all agreements are accurate and comprehensible.
What should be considered when returning a leased vehicle?
To ensure a smooth return of the leased vehicle, it is advisable to follow these steps:
- Vehicle Inspection and Damage Repair: Prior to the return, have the vehicle inspected to assess its condition. If any damages or signs of wear and tear have occurred during the lease period, consider repairing them before the return. Repairing damages yourself is often more cost-effective than having the leasing company bill you for them. Additionally, thoroughly clean the exterior and interior of the vehicle as the first impression matters.
- Restore the Vehicle to Its Original Condition: If you’ve applied your company logo to the car, replaced the rims, or made any other modifications to the vehicle, ensure that these changes are reversed before handing it back. Also, remove all personal belongings from the vehicle.
- Schedule a Return Date: Contact the leasing company well in advance and schedule a return date.
- Return All Documents and Accessories: Remember to bring all documents such as vehicle papers, service records, and user manuals on the day of the return. Also, make sure to return any additional items like navigation devices and CDs.
- Carefully Review the Return Protocol: During the vehicle return , the condition of the car, its mileage, and any defects or damages should be documented in a report. Thoroughly review this document and address any questions or concerns. If you disagree with any of the listed defects, make sure it is noted in the protocol as well.
Frequently Asked Questions About Business Car Leasing
What is the residual value of a vehicle?
The residual value of a vehicle refers to the estimated worth of the vehicle at the conclusion of a specified period, such as the end of a leasing contract or a financing agreement. It represents the amount that the vehicle is expected to be worth after accounting for all payments and expenses. The determination of the residual value relies on various factors, including the vehicle model, year of manufacture, mileage, the condition of the vehicle, and the current market value of comparable vehicles.
What is the leasing factor?
The leasing factor indicates the relationship between the monthly lease payment and the vehicle’s Manufacturer’s Suggested Retail Price (MSRP). It is typically expressed as a percentage. The leasing factor allows for the comparison of various lease offers and a more accurate assessment of the attractiveness of a leasing agreement. A lower leasing factor signifies that the monthly payment is relatively affordable in relation to the vehicle’s value. Conversely, a higher leasing factor indicates a greater monthly financial commitment.
What is a lease return?
A lease return refers to a vehicle that is returned to the leasing company at the end of the lease term.
Can new entrepreneurs and self-employed individuals also lease vehicles?
For startups and self-employed individuals, commercial leasing is an attractive financing option as it preserves liquidity and offers predictable costs. However, when entering into a leasing agreement, proof of creditworthiness is typically required. Additionally, the business should have been in operation for at least six months, and in some cases, even 12 months. For those in the early stages of entrepreneurship who cannot provide financial statements (such as a Business Activity Statement), there is often the option to make a deposit or down payment or provide a guarantee. To learn more about what startups need to consider, you can find additional information in our article on leasing for new entrepreneurs.
The Essentials of Corporate Car Leasing
Leasing corporate vehicles offers financial predictability through monthly lease payments, flexible contract terms, tax benefits, and access to up-to-date vehicle models.
Distinctions can be made between mileage-based leasing and residual value leasing. While the latter often offers more affordable rates, it places the residual value risk on the lessee.
Utilizing software solutions can simplify proposal and contract management, cost control, and adherence to deadlines during the leasing process.
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