Business car leasing is a type of financing similar to renting a vehicle. You do not own the vehicle but use the vehicle as if you do, only pay for usage and taxed on your payments only. When a business leases a car they are referred to as the lessee and the financing company is the leaser. Both the lessee and leaser names are on the vehicle insurance. In addition, the leaser name is also on the vehicle title. This is why the lessee only pays taxes on the monthly lease payments rather than on the whole purchase price of the vehicle. It’s as if the lessee is renting the car and only paying taxes on the amount of time the vehicle is used. In contrast, when you purchase a vehicle using traditional financing you own the vehicle, pay for it in its entirety over the financing term and get taxed on the full vehicle purchase price.
One of the purposes of business car leasing is to allow a business to purchase a more expensive vehicle at a lower monthly payment. This is done by paying for usage over a specific term. For businesses another purpose of car leasing is to classify the vehicle payment as an expense so it can be tax deductible. The same is true for associated vehicle related expenses such as insurance, gas, maintenance and repairs.
At the completion of a car lease the lessee has a couple of options. They can either return or buyout the vehicle. If a lessee returns a vehicle the dealer will sell the vehicle used and will generally earn a profit on the sale. Meanwhile the buyout amount or residual value of the vehicle is pre-determined at the beginning of the lease. This amount can vary from one manufacturer to another but is generally around 50-60% of the total vehicle price.
One of the restrictive parts about vehicle leases is that lessee’s cannot simply sell the car to someone else. They must first buyout the vehicle from the leasing company prior to selling it. Buying a lease out early generally results in some penalties versus paying out a traditional vehicle finance. Alternatively, there are various sites which cater to lessees who wish to get rid of their car leases by swapping them or transferring to someone else. This usually allows businesses to avoid buying out a lease or waiting until the end of the term to return the vehicle.
Leasing like any other type of financing is based on an approval process tied closely to your credit score. With a higher credit score you generally qualify for leases and better rates. By contrast, a poor credit rating can result in your lease application being denied and perhaps the availability of only sub-prime rates. For businesses looking to get any type of financing and leasing most financial institutions require that you have been in business for at least two years so they can verify your earnings for those two years. This may vary from country to country and from one leasing company to another but it is something to keep in mind when looking for business lease financing. You can check your credit scores at one of the following credit bureaus.
www.transunion.ca (.com for US)
www.equifax.ca (.com for US).