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To buy or to lease – How can your business cut company vehicle costs?

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Despite this positivity, maintaining cost efficiency wherever possible remains the focus, and firms are increasingly looking at introducing new ways of working to achieve this. According to our research, new cars and vans have been identified as a key area of spend for SMEs this year, as the cost associated with company vehicles is an area coming under increasing scrutiny. This is particularly pertinent for the construction and transport sectors, with 28 per cent and 20 per cent of respondents respectively planning to either invest in buying or leasing a company vehicle in 2015.

For businesses looking to invest, one of the most important decisions to make is whether to lease or purchase the cars or vans outright. It is a crucial choice, and one that requires thorough consideration as a wrong judgement can end up costing a significant sum of money. 

If you’re looking to buy rather than lease, the starting point, and often the challenge, can be finding the money from existing capital to pay for the vehicle upfront. This significant outlay may put pressure on cash flow resources and can lock up capital in fixed assets that could be used more productively in other areas of the business.

In addition, this approach presents the company with all the risks of ownership, which include depreciation, repairs, servicing and maintenance costs. In particular, firms that prefer to purchase vehicles outright as opposed to leasing need to closely monitor residual values and may end up out of pocket if they deteriorate more sharply than expected. As the mileage clocks up, maintenance costs are only going to increase and the potential resale price will drop in the face of competition from newer and more energy-efficient models.

Leasing, however, can eradicate many of these issues associated with outright purchase, saving businesses time, money and stress. There are broadly two types for firms to consider: a finance agreement where the business takes on the risk of a vehicle’s value decreasing, or the more popular operating lease, such as a contract-hire, where the leasing company takes the risk.

By selecting this method, firms can realise a number of benefits. By safeguarding against residual value fluctuations, a business is not burdened with a depreciating asset on the balance sheet. This frees up cash flow, while all related costs, such as maintenance and servicing, can be fixed and budgeted for in advance. 

An additional benefit is that SMEs benefit from the buying power of leasing companies and can therefore access vehicles they could not previously afford to purchase outright. This offers businesses the ability to reward their current employees through improved remuneration packages and also become a more attractive proposition for job seekers – a benefit which pulls significant weight in the recruitment market. The 2014 Report on Motoring, released by Lex Autolease, evidences this with six out of ten current company car drivers stating that the degree of choice that they had over their next company car is important when considering a new role. 

Access to cleaner, new models with up to date engine technology every two, three or four years (depending on the contract length) enables businesses to lower their tax bills through reduced carbon emissions and cut costs further through increased fuel efficiency.  

In addition, leasing also enables certain types of businesses to claim back 100 per cent of VAT if the vehicle is used exclusively for business purposes, although cars available for private use will have 50 per cent of the VAT blocked.

Regardless of which funding choice companies opt for, it is essential for business owners to work out the whole life cost of a particular vehicle before embarking on selecting a new car or van. To understand the full impact on a firm’s finances, an analysis of the potential expenditure is required for the life of the vehicle – this includes not just the initial outlay, but depreciation, maintenance costs, fuel consumption, capital allowances and National Insurance contributions. Once these factors have been considered, owners will be in a position to select the most efficient and cost-effective company vehicle funding option.

Image: Shutterstock

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