What Is Fleet Leasing? A Comprehensive Guide
If your business model depends on having a fleet of reliable commercial vehicles–– vans, pickups, or semi-trucks—practicing fleet management is essential to your company’s success.
Managing a fleet is a complex task that involves several aspects of business operations. You need to acquire the vehicles, perform preventative maintenance, practice fleet fuel management, train and monitor drivers, ensure compliance, analyze your data, and so on.
That said, everything starts with fleet acquisition. So, when the time comes to expand or update your fleet, one of the most important decisions you will likely face is whether to buy or lease the vehicles. Depending on your business and its specific needs, either option could be the right answer.
How do you know what’s best for you? Let’s discuss fleet leasing.
What Is Fleet Leasing?
A fleet lease is a contractual agreement between the business and the owner of the fleet, where the business gets to use one or more vehicles in exchange for a monthly fee.
Unlike purchasing the vehicles, with fleet leasing, the business doesn’t own the vehicles but rather rents them for a set period of time—typically, at least a year.
Depending on the vehicle supplier and the lease contract, the business may have the option to lease the same exact vehicles or a mix of different types of vehicles. This flexibility can be advantageous for businesses with varying operational requirements that may rely on different equipment.
Once the lease contract has expired, you then have the option to:
- Renew the contract and upgrade to newer vehicles
- Purchase the leased vehicles
- Find a new vehicle supplier
How Does Fleet Leasing Work: Types of Leases
Today, modern businesses have the luxury of tailoring a lease agreement to suit their needs and budget. Some of the more common types of fleet leases include:
- Open-ended lease – This type of agreement is optimal for companies that have short-term or seasonal fleet vehicle leasing needs. Generally, the lease will end after a year, then the business has the option to continue on a month-to-month basis. At the conclusion of the lease, the business will need to pay for the difference between the residual value of the vehicle and the actual market value at that point.
- Closed-end lease – Sometimes referred to as a “walk-away” lease, a closed-end contract ensures that, once the contract has ended, the business won’t have any further obligations—so long as the vehicle was properly maintained and didn’t exceed mileage limits. This type of lease is ideal for businesses that have long-term fleet leasing needs (at least three years).
- Sale and leaseback – If you already own a fleet, some leasing companies may be willing to purchase those vehicles and then lease them back to you. This fleet leasing option makes it possible to free up cash flow that may be tied up in your company vehicles.
- Single-payment lease – Some leasing companies allow a business to pay for the entire lease term upfront in lieu of monthly payments.
Depending on your business, any of these lease options could be right. That said, the most common type of commercial fleet lease agreement is the closed-end lease.
Benefits of Fleet Leasing
What are the arguments for leasing rather than buying your vehicles? Some of the advantages of leasing fleet vehicles include:
#1 Reduced Upfront Costs
To purchase a vehicle, you’ll need to pay with cash upfront or obtain financing. Even acquiring a single vehicle in this manner may be cost-prohibitive for a small business or startup, let alone paying for an entire fleet of vehicles.
Leasing fleet vehicles lowers your company’s initial costs, which enables you to start doing business without having to save up for such a large purchase. Instead, you pay a small initial down payment, which is typically only a fraction of the total cost of an outright purchase. This frees up cash flow that can then be allocated toward other business activities or investments.
Along these lines, the monthly lease payment tends to be lower than the monthly costs of a loan or financing contract that typically have high-interest rates.
#2 Predictable Monthly Costs
When you purchase a car, the buck doesn’t stop there. You also have to budget funds for vehicle fleet maintenance, repairs, and replacements. This can add significant volatility to your budget.
With a closed-end lease, you only pay the fixed and scheduled monthly payment. This payment covers both the usage of the leased vehicle, as well as its regular maintenance and upkeep. For example, if a vehicle’s transmission fails, the lease agreement would likely cover the cost of repair and replacement (so long as you abide by your part of the agreement).
This predictability makes it easier to plan for the future and grow your business, invest in opportunities, or pivot should the need arise.
#3 Reduced Maintenance Costs
When you own a fleet, preventative maintenance is entirely up to you. But planning and managing that process can be a full-time job in and of itself. You need to:
- Set maintenance schedules
- Triage vehicles
- Track fleet maintenance history
- Manage parts and inventory
- Train drivers to inspect the vehicles
- Monitor driver behavior
- Find trained and certified technicians
- Deal with administration and paperwork
Naturally, this is a complex management process that necessitates detailed planning and deployment to ensure that the fleet runs smoothly.
Conversely, with most long-term leases, the vast majority of these issues would be bundled into your premium and handled by the leasing company. You don’t need to worry about all of the headaches associated with owning and operating the vehicles. Instead, you can focus entirely on value-add activities.
#4 Simplified Management
Along these lines, many established providers will also provide the business with access to various flee-management support tools and programs, such as:
- Fuel expenditure records
- Mileage tracking
- Location tracking (learn more about the benefits of fleet telematics)
- Insurance claims support
- Maintenance scheduling
- Vehicle tags and license renewals
- Analytics and reporting
- Lifecycle optimization
- Fleet remarketing
- Driver safety training
Leasing reduces your labor and admin costs, seeing as you don’t have to hire staff or pay for technology to perform these tasks.
Lease agreements can be more flexible than an outright purchase.
Depending on your lease agreement, some fleet operators will negotiate a deal that allows them to upscale or downscale their fleet according to demand and seasonality.
For example, if the business experiences a downturn, it can return leased vehicles at the end of its lease term, rather than having to find a seller or eat the cost. Conversely, if the business needs to scale, it can simply lease more vehicles.
#6 Access to the Best Vehicles
Most fleet agreements will run cyclically. After the term ends, the vehicles are returned to the supplier. Then, upon signing a new contract, the business will gain access to a new fleet of vehicles offering the latest technologies, features, and safety measures.
Seeing as vehicle technology rapidly evolves, this ensures that you’re not stuck with an obsolete model. Having newer, better vehicles can improve your brand image, protect your employees, and reduce your liability and insurance costs.
#7 Tax Benefits
Depending on where you live, as well as the specific stipulations within your lease agreement, you may be able to write off taxes related to your lease. For example, Section 179 of the American tax code enables companies to deduct the full lease price of qualifying work vehicles, such as 1:
- Dump trucks
- Construction equipment
- 9+ seater passenger vehicles
- Tractor trailers
- Cargo vans
Before you sign a lease, speak with your accountant to fully understand any possible tax breaks that may be available, as well as specific contractual obligations that must be met to qualify for them.
How Does Fleet Leasing Compare to Buying?
So, should you lease or own? There’s no “right” answer to this question. Just like there are pros and cons of leasing, there are also pros and cons of buying fleet vehicles. Choosing one pathway or the other is a decision that’s contingent on a variety of factors—each option has tradeoffs and its own set of pros and cons.
Ultimately, the choice between owning or leasing will depend on the unique needs and preferences of a business. Even two seemingly similar companies may go down different paths based on their individual priorities.
As noted above, some of the potential advantages of purchasing your fleet include:
- Greater control over fleet usage and branding
- Long-term savings costs (especially if you have ready capital)
- Tax benefits
- The ability to customize, equip, and brand your fleet as you desire
- Valuable assets on your balance sheet
In exchange for that, you may need to worry about upfront costs, depreciation, risk of obsolescence, and significantly higher maintenance and administrative costs.
Leasing Your Fleet
Leasing a fleet is a viable alternative to purchasing vehicles—one that makes fiscal sense for small businesses and startups that have limited capital and wish to maintain a healthy cash flow.
So long as you follow the stipulations of your lease agreement, you can enjoy the benefits of owning a vehicle without all of the headaches associated with actually being an owner.
Whatever you do decide, you’ll need to pay special attention to your fuel spend.
At AtoB, we can help with that. Our Visa fleet card makes it easy to monitor, analyze, and, ultimately, reduce the money you pay at the pump to power your fleet.
Get started today to enjoy a world of fleet card benefits.
1 IRS. IRS issues guidance on Section 179 expenses and Section 168(g) depreciation under Tax Cuts and Jobs Act. https://www.irs.gov/newsroom/irs-issues-guidance-on-section-179-expenses-and-section-168g-depreciation-under-tax-cuts-and-jobs-act