5 Financial Considerations For Small Business Automobile Leasing

There are several important considerations for small business automobile leasing. At large, choosing whether to lease or buy a vehicle for your company boils down to priorities. For some small business owners, leasing or buying is purely dependent on costs. On the other hand, other small business owners factor in emotional connection, lease length, or resale concerns. It’s also important to think about differences in tax deductions between a lease and a purchase. A lease will often afford your company more tax write-offs than a loan. Read on to learn about several financial considerations for small business automobile leasing.

Open Vs. Closed Lease

One essential factor to consider when leasing an automobile for your business is an open vs. closed lease. Typically, when you negotiate a lease for a company car at a dealership, you will be offered the choice between an open and closed lease. Open lease contracts are typically categorized as a type of commercial lease. Here, you pay the difference between the estimated resale value (residual value) and the actual resale value at the end of the lease. If the vehicle is driven more than expected, the actual resale value can be low. This results in higher costs. On the other hand, at the end of a closed lease, you only pay for extra mileage and extreme damages. You need to consider an open vs. closed lease when obtaining an automobile for your small business.

Credit Score Effects

In addition, you also need to assess your credit score effects when leasing a company car. When you apply for an automobile lease, you cause a credit inquiry on your report. This can have a small negative impact on your credit score. Moreover, taking on a lease increases credit use. This can also have an adverse effect. Over time, this credit utilization will decrease. With timely payment, you will be able to increase your credit history again. Notably, leases are considered installment loans. These do not negatively impact your credit score as much as high utilization rates on other forms of revolving credit. Nevertheless, when leasing an automobile for your small business, you need to consider credit score effects.


Moreover, when leasing a car for your small business, you also need to consider maintenance. For example, if your car has damage beyond normal wear and tear, you could be charged additional fees when returning it to the dealer. Usually, if a car has a scratch smaller than the length of a business card, most companies won’t charge a penalty. However, the definition of normal wear and tear tends to vary across different dealers. For example, local commercial truck dealers may inspect your car for dents, scrapes, windshield/window damage, and tire wear. Automobile leasing companies will also check your upholstery for stains. When signing a lease for a company car, it is imperative to discuss how routine maintenance affects the end-lease conditions. You need to consider maintenance when leasing a vehicle for your small business.

Expense Risks

Besides maintenance fees, there are other expense risks that you need to evaluate when leasing an automobile for your small business. For instance, you will need to pay a monthly lease payment equal to the depreciation, finance costs, and sales tax added together. In addition, there can be other fees such as drive-off fees. A drive-off fee is a deposit that you may need to pay when upfront. It usually contains your first month’s lease payment and an extra $1,000. If you go over your mileage cap and drive more than your leasing agreement regulates, you may be subject to other expenses as well. Typically, there are mileage penalties from $0.10 to $0.25 for every additional mile. You need to review your small business’s automobile leasing agreements carefully and ask the dealer about expense risks before signing any documents.

Residual Value

Furthermore, when leasing your company car, you also need to evaluate the residual value. Essentially, the residual value is how much the leasing company expects your vehicle to be worth at the end of the lease. This is based on the number of miles you agree to drive annually as well as other terms in the agreement. At the end of your lease, you may have the option to buy your vehicle for the residual value, regardless of its open market value at the time. With this lease-to-buy option, you’ll know the resale value of the automobile from the beginning of the agreement and can potentially purchase the vehicle below market value. Otherwise, you still have the option to walk away from the car once the lease is up. You need to understand that the higher the residual value, the lower monthly payments tend to be. It is imperative to consider the residual value when you are leasing an automobile for your small business.

There are several key factors you need to consider for small business automobile leasing. For example, you need to think about how an open vs. closed lease will affect your automobile expenses. In addition, you need to consider how a company car lease will affect your credit score. Moreover, there can be maintenance fees at the end of your lease that you need to assess. Also, you need to know of other expense risks involved when leasing a car. Furthermore, you need to evaluate your vehicle’s residual value before signing your leasing agreement. Like a commercial office lease agreement, you may have to negotiate to get the best deal. Consider the key points above for small business automobile leasing.

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