Scaling your business means investing in the areas that will make a major difference to your bottom line. Building a fleet of commercial vehicles is a smart move for many business owners—when done right.
Choosing the right vehicles for your company goes beyond finding wheels that will simply get the job done. As a business owner, you need to consider how you’re going to finance these big-ticket items, decide between buying new or used, and how to maximize the tax benefits of this business expense.
To help find the best way for your small business to buy vehicles, we’ve outlined the top considerations to keep in mind:
Should I buy new or used?
There’s much to consider when contemplating buying new or used vehicles for your business. Vehicles that are mechanically sound and perform well are important, but you also need to keep in mind how the vehicles look — and represent your company.
New vehicle advantages
The main advantage of buying a new vehicle is that it typically includes a warranty. Having your company car under warranty saves you the headache and financial hardship of costly repairs. New cars need very few repairs in the first few years, reducing maintenance costs.
A new vehicle means new technology, something most businesses can benefit from. Newer cars have better gas mileage and lower emissions, saving you money at the pump. Since 2004, technology has been used to increase vehicle fuel economy by 29% while reducing CO2 emissions by 23%. You’ll have a better chance of finding a hybrid or electric car, which can further reduce expenses. If your drivers require Bluetooth connections for hands-free GPS or other modern connectivity needs, you’ll find these features more easily when buying new.
Dealers offer competitive financing on new vehicles, making a new purchase more affordable. While write-offs are available for new vehicles, you’ll still need an upfront investment or down payment to buy a car for business use.
New vehicle disadvantages
The main disadvantage of purchasing a new vehicle is depreciation — you lose money the moment you drive it off the lot. By the time you’ve driven your new car to work, it’s already worth hundreds – if not thousands – less than what you paid. Carfax data shows that cars typically lose more than 10% of their value in the first month, and it keeps dropping from there.
Purchasing a new business vehicle can be expensive. At a minimum, you’re looking at a few thousand dollars in capital to buy new. Buying a new car also means higher taxes and insurance rates for your business driving. The more specialized your company vehicle requirements are, like service trucks or cleaning vans, the more it will cost you.
Depending on the nature of your business, it can be hard to find a used company vehicle that has all the requirements and features you need.
Used vehicle advantages
The best advantage of buying a used car is the cost savings. By letting someone else take the biggest depreciation hit on the car, your company saves money right off the bat. In some cases, you can even sell your car for nearly the same price you paid for it in the next few years. If you don’t have the cash ready to spend on purchasing a vehicle, ask your bank or local credit unions about the option of a car loan.
Saving on auto insurance is another benefit. Depending on the vehicle, how many employees will be using the vehicle, and business use, you’ll likely find more affordable insurance rates on used cars and trucks. If your cash flow is tight, choosing a used vehicle can save you money.
Pro tip: When buying a used company car, review Consumer Reports or a free alternative like CNET to ensure you choose a model that’s performing well. If you have questions about a used vehicle, you’ll likely find answers on these consumer insight platforms.
Used vehicle disadvantages
Used vehicles aren’t always as reliable as new ones and can end up costing more in maintenance and repairs. Mechanical issues or breakdowns can end up costing you more than just repair fees, the downtime can also dig into your company’s revenue stream and cause major workflow delays.
Another disadvantage of buying used is compromising on the color and features of the vehicle as well. For some businesses, this isn’t a big issue. But if you’re managing a fleet or offer unique services that require a special vehicle, it can be challenging to find a used vehicle that meets your needs. If you need access to modern tools like fleet tracking software, it might be harder to source a car with modern technology.
Buying a car used means you might not know its full history. Used vehicles will also have more miles on them, which means factoring in operating expenses to maintain the car and a plan for unexpected repairs.
Pro tip: Always have a mechanic inspect a used vehicle before making a purchase decision. Check if services like the Certified Pre-Owned (CPO) are available in your area, which can help vet a used vehicle and provide business owners with more peace of mind.
Branding your company cars
Branding your company vehicles is a great way to get your business name out in the public eye.
Your company car plays a huge role in the impression you make on clients and employees. Showing up to a job in an old beat-up car can make you look unprofessional and unestablished. On the other hand, arriving in an over-the-top luxury vehicle may seem a little too flashy and cause customers to question your pricing model.
Whether you’re buying one company car or a whole fleet, make sure your business cars represent you and your team well.
Should I buy or lease vehicles for my small business?
Leasing is best if your fleet has a high turnover rate and requires maintenance in distributed locations. Buying is best if your fleet has a low turnover rate, experiences a lot of wear and tear, and doesn’t prioritize vehicle replacement flexibility.
Lease agreements can be full of confusing language, hidden fees, and financing options that seem impossible to figure out without help from your accountant. While it’s never a bad idea to have your accountant review a financing deal, here are some things to consider when leasing a business vehicle:
The Manufacturer’s Suggested Retail Price (MSRP)
The MSRP is the sticker price of the vehicle and determines the initial balance of your lease. It’s an important term to keep in mind when cost comparing your vehicle purchase, as lease payments are based on this.
This commonly-used term in lease agreements describes the value of the vehicle at the end of the lease. If you want the best-priced lease, make sure you check the residual value. Longer term leases have a lower residual value, as the vehicle will be older when you return it.
Estimated annual mileage
When leasing company vehicles, there’s a mileage limit you can’t exceed. If you know your fleet of vehicles will be driving over the limit, you may want to consider a high mileage lease for your small business. Be sure to track the miles you’re driving on the odometer so that you don’t exceed this limit.
Interest, taxes, and fees
Always factor in the interest and taxes on lease payments. These fees add up quickly and are often hidden in the small print on lease agreements and advertisements. While you may be able to negotiate some charges associated with leasing, the interest rates are usually fixed. Other fees to keep in mind when leasing include the down payment, security deposit, and administrative fees for paying your lease off early.
Deducting lease costs
As always in the case of large business purchases, you’ll want to consider the tax deductions available. There are two ways to write off your company’s leased vehicle; standard mileage or the actual expense method. If you use the standard mileage rate, you can’t switch to the actual expense method in later years. Learn more about the latest tax implications and benefits when buying or leasing cars here.
Who should own the company vehicles?
A vehicle used for business can be owned by either the business, business owner, or employee. Tax breaks can vary based on the ownership status of the vehicle. Talk to your accountant to figure out which ownership option makes the most sense for you.
If anyone in the business plans to use the car for personal use, this will also impact your eligibility to deduct certain business expenses. Learn more about the tax implications of registering your business vehicle so you can make the best option for you.
Should I track my company vehicles?
Once you’ve purchased your company vehicles, we recommend that you protect your investment! Track them using GPS technology in order to increase driver accountability and provide outstanding customer service to your clients.
Force by Mojio offers a free 30-day trial so you can experience first-hand how the program can benefit your fleet.