Small business owners often use cars as part of their day-to-day activities. Leasing a business vehicle can be an attractive strategy for many, especially those who like the idea of upgrading to a newer car every few years.
However, leasing a car for business isn’t ideal for everyone. Here’s what you should know before you try it, including how it works and when it might be better to buy.
How To Lease a Car for Business
The first step to leasing a car for your business is to decide whether to complete the transaction in your own or your business’s name. Fortunately, business use of the vehicle is allowed either way.
Personal car leasing is usually better when you have a good consumer credit score, especially if your company is too new to have much in your business credit file. However, you won’t be able to avoid personal liability for the agreement.
Taking out an operating lease through your business is more challenging. Your company must be well established as a separate legal entity other than a sole proprietorship, and it’ll need a good business credit score.
However, business car leasing may let you avoid signing a personal guarantee. If your business can’t keep up with the monthly payments, it’ll be more difficult for a leasing company to pursue your personal assets.
After deciding one way or another, start researching vehicles that can meet your business needs without breaking your budget. It’s also wise to learn the jargon and complexities of car leases. You don’t want to sign anything you don’t understand.
Next, pick a handful of reputable lessors and start shopping around. The National Vehicle Leasing Association is a great place to start, and inquiring with multiple providers helps ensure that you get the best deal possible.
Don’t be afraid to negotiate the lease terms with each prospective lessor, just as you would if you were buying the car. Your research into leases will be critical here, as you’ll need to understand the language to be effective.
Once you’ve reached an agreement, you’ll need to submit an application. It will involve a credit check, just like applying for a credit card. If you’re approved, all that’s left is to pay the upfront costs and sign the lease agreement.
How Does Leasing a Car for Business Work?
Leasing a car for business is essentially a long-term rental that lasts between roughly two and four years. There are often some minor upfront costs, including a security deposit, an acquisition fee, and a few miscellaneous charges.
You’ll also need to make fixed monthly payments throughout the lease term to maintain your access to the vehicle. The lease cost covers your projected depreciation, interest, and sales tax.
You may not have to pay for maintenance costs, but that depends on the terms of your lease. However, you’re still responsible for maintaining the car according to the schedule in the owner’s manual, regardless of whether you’re paying for it.
In exchange, you can use the vehicle for personal and business purposes. However, there are some significant restrictions, the most notable of which is the mileage allowance.
Your mileage allowance is the maximum amount of driving you can use the vehicle for during the lease. It often ranges from around 10,000 to 15,000 per year, but the total for the lease term is what matters most.
If you exceed your allowance, the leasing company will charge you a small fee for every additional mile. It’s usually between $0.10 and $0.25 per mile, so it can add up quickly if you go over by a significant amount.
At the end of the lease, you’ll usually have the option to return the car or purchase it for its remaining value. Even if you return it, you may incur a disposition fee or have to pay for any excess wear and tear.
Business Car Lease Requirements
Leases aren’t loans, but you’re still essentially borrowing from the lessor. As a result, there are similar qualification requirements. Generally, you’ll need to prove your identity and demonstrate that you’re willing and able to repay your obligations.
However, the details vary depending on whether you use your name or your business’s to complete the lease contract. When personal leasing, expect your application to involve the following:
- Identity verification: You’ll need to provide some standard personal information, including your name, address, email, phone number, and Social Security Number. You’ll also usually need to show some form of government-issued ID.
- Proof of auto insurance: Even though you’re not purchasing a company car, you’ll need to show that you have full coverage and gap insurance, then maintain it throughout the lease term.
- Proof of income: Lessors need to know that you can pay them back, so they’ll want to verify your earning power. Since you’re a business owner, you probably don’t have pay stubs to show. Instead, you can bring bank statements or prior year tax returns.
- Personal credit check: You’ll have to undergo a hard credit check during the application process. The score requirements are generally higher than they are to finance a car. Most lessors want a good to excellent credit score, so aim for at least 700.
Applying for a lease through your business entity usually involves similar requirements, but your business is the subject instead.
For example, you’d need to provide your company’s Employer Identification Number (EIN) and copies of its prior year tax returns, then pass a business credit check.
Pros of Leasing a Car
Leasing a car instead of buying one offers several significant benefits to small business owners in the right circumstances. Here are the primary reasons to consider it.
Lower Upfront Costs
When purchasing a car, your down payment will often be around 20% of the vehicle’s value. With car prices at an all-time high, that can be a significant financial burden to small business owners.
Not only do you usually avoid making a down payment when you lease a car, but you can also roll your sales tax into your lease payment, further reducing your upfront costs. As a result, leasing may be favorable for new businesses with low cash reserves.
Lower Monthly Payment
In addition to being less expensive upfront, your monthly lease payment will probably be lower than a loan payment for an equivalent vehicle. The average fixed monthly payment was $540 for a lease and $667 for a loan in Q2 2022.
In addition, you’ll often find that your leased car is still under the factory’s new car warranty, which you can use to get free maintenance and repairs.
Vehicle Flexibility
It’s not a direct financial benefit, but leasing makes it easier for small business owners to trade their cars in for a different vehicle every few years. You can ensure that you always have a new car with the most recent technological upgrades.
If you use your company car to meet with clients, it can be beneficial to have a vehicle that makes a good impression on them. Leasing lets you do that much more affordably, helping you get a better car for less.
Cons of Leasing a Car
Leasing a car is advantageous for many small business owners, but it’s not for everyone. Here are the most significant downsides to the strategy.
No Equity Building
Buying a vehicle lets you build equity in the asset. Whether you pay in cash or finance the purchase, you won’t have to make monthly payments forever.
Leasing doesn’t offer that benefit. You can lease a vehicle for less than it would cost you to buy it, but you’ll find yourself right back where you started once the term ends. If you continue to lease instead of buy, you’ll be stuck making car payments indefinitely.
Mileage Limit
Unfortunately, you can only drive a leased vehicle a certain number of miles during your lease term. You have some flexibility in your annual usage, but you’ll pay additional charges at the end of the agreement if you go over your budget in aggregate.
If you need to drive your company car significantly more than lessors will allow, you may need to buy a vehicle instead.
Higher Credit Requirements
For better or worse, it’s surprisingly easy to qualify for a car loan. Your interest rate will be much higher if you have bad credit, but you’ll probably be able to qualify for financing and purchase a vehicle.
However, it’s much harder to qualify for a personal or business lease with poor credit. If you don’t have good enough credit scores, you may have no choice but to buy.
Is It Better To Lease or Buy a Car For Business?
There’s no universal answer to whether you should lease or buy a car for business. It always depends on your circumstances and preferences. Generally, leasing a car is more appealing when you meet the following criteria:
- High credit score: You generally need a better credit score to get a car lease than a car loan. Without good credit, business leasing may not be an option.
- Lower driving use: Leased cars have mileage limitations that can make it expensive to drive more than roughly 12,000 miles per year. Leasing is most favorable when that restriction isn’t an issue.
- Interested in car flexibility: Many people choose to lease a car for their business because they want top-of-the-line vehicles to impress their clients. If that’s important to you, it may be worth leasing.
- Averse to costs in the near term: Leases are cheaper upfront and during the agreement, but you’ll have to make payments indefinitely. Therefore, they save you money in the near term but cost you in the long run.
Meanwhile, you may find it easier to buy than lease a car if you lack a good credit score. It’ll be even more attractive if you have healthy cash reserves, don’t care about getting a new vehicle every few years, and expect to drive more often than the average.
