If you need to get a new commercial truck for your business, you have the option of renting, leasing or financing the vehicle. While all these methods require you to make monthly payments while you get your truck on the road, there are a few differences between them which can help you choose between these alternative methods.
Commercial Truck Lease
Going for the lease option for a commercial truck is quite similar to renting an apartment. You can start using the truck immediately but with some rules till the end of your lease. Similar to renting an apartment, the person who has leased the truck to you would be responsible for the maintenance and repairs of the truck unless the damage has been caused by the misuse or neglect by the user.
The user makes monthly payments, like you would pay rent. Most of the times, the commercial truck lease is for at least three to five years, according to the terms of the lease. The leasing company usually buys the truck and then allows the user to make use of the vehicle.
There is also the possibility that once the lease for the commercial truck is over, the user may have the option of buying the truck from the owner rather than returning it back to them. The purchase price of the truck would be the residual value determined by the original documents of the truck lease. The whole idea is that the price of the truck should be much lower than buying it outright, like having a rent-to-own contract.
Commercial Truck Financing
Financing commercial trucks or a commercial truck loan allows the user to make payments on a monthly basis for a particular period of time, similar to the commercial truck lease. The main difference between them is that when you are financing a commercial truck, you are actually making payments toward the actual value of the truck. As soon as the terms of the loan are complete and the user has made all payments properly, they will become the owner of the truck.
Difference Between Lease and Rent
Lease is an instrument or a contract that transfers the right to use a property or an asset to another person for a specific period of time. Rent is a periodic payment made to the owner of a property or an asset for using that particular property or asset as determined by the rental agreement.
The length of the agreement for the lease is usually between six and twelve months, but it can also be set for any other length of time on which the two parties agree upon in the lease agreement. On the other hand, a rental agreement ends every month and can be renewed if that’s what both parties want. This renewal can even be automatic.
When it comes to renting, there is also the rental purchase option which combines the convenience and flexibility of a rental transaction with the ability to own that asset. This means you can see if the asset works for you and buy it later if you prefer.
How to Decide Which Option to Choose
The questions you must ask yourself before deciding whether you should rent, lease or finance your next commercial truck are as follows:
- How long do you need the truck for?
- What is the intended use of the truck?
- What are the long-term goals of the business?
- What is the current tax situation?
- What is the state or condition of your existing trucks?
- What is the creditworthiness of the business?
- How is the cash flow situation like?
- How is the ability of the business to manage the maintenance of the asset?
When Should You Rent
Commercial truck or commercial vehicles should be rented when your transportation needs are for the short term, such as for a couple of months. If the needs are for the long term, the best thing is to consider a lease for the commercial vehicles.
Renting can be a good solution if the business is seasonal or if there has been a sudden increase in demand, like new customers who may require additional fleet, but the business does not consider the demand or requirement to sustain for a long duration. Renting may also be considered if the commercial vehicle requires too much maintenance or will be outdated for the business soon.
When Should You Lease?
Leasing has become quite a popular option in recent years due to the changing technology in most industries. There are various options in terms of equipment leasing or new or used commercial truck leasing. Leasing proves to be an inexpensive method in the short term as compared to the ownership option since you are only paying for using the vehicle. When it comes to leasing, it also requires less upfront cost and there are less credit restraints of the purchase.
There are certain benefits of a commercial truck lease. For example, the monthly payments for a lease are lower as opposed to financing the truck because in a lease, you are not paying for the cost of the truck. The lease does not require a down payment either, so you would not need to give a lump sum in one go. Moreover, a lease agreement avoids a person getting into debt and gives the user the option to upgrade to a better or new vehicle when the terms of the lease are complete.
Leasing should be considered as a viable option when the cash flows of the business are slim and the margins being made on the particular project are tight. Leasing can also be considered if your business is growing fast and you need to invest cash in other areas.
When Should You Finance (Buy)?
The most obvious advantages of equipment financing or vehicle financing are the tax considerations and depreciation of the asset, where a business can save money through taxes. There are, however, ownership costs which must be considered.
When you are buying a commercial truck or vehicle, especially if it is on credit, you are building up equity in your books. This means that you have the ability to trade that vehicle for a newer one if you find that there is a need to upgrade. This option, however, also exists when it comes to leasing.
The biggest advantage is that at the end of the term, you would be the owner of a truck.
When you finance an asset, there are other costs involved as well, which you have to bear as the owner, such as the management and maintenance of the commercial truck.
Advantages and Disadvantages
There are advantages and disadvantages to leasing, renting and financing commercial trucks, which are as follows:
Advantages of Renting
- Ideal if the need is only seasonal.
- There is no financial commitment involved.
- Businesses can determine which type or model of commercial truck works for them.
- Eliminates the need to take care of the maintenance of trucks.
- You can have the latest fleet of commercial trucks.
Disadvantages of Renting
- You do not own the truck.
- You end up paying more over the long run.
- You have to be extra careful.
Advantages of Leasing
- No down payment.
- Lease payments may be deducted from taxes.
- Lower monthly payments.
- You can have access to a brand-new truck.
- You can transition into a new truck every few years.
Disadvantages of Leasing
- You do not own the truck at the end of the term.
- Your mileage may be restricted to the number of miles.
- You may end up paying more over the years.
- You may have to pay additional wear and tear costs.
Advantages of Financing
- Tax benefits or depreciation.
- You do not have to worry about returning the truck.
- You can modify it however you want.
- You do not have to worry about any damage.
- There is more flexibility as you can sell the car as and when you want.
Disadvantages of Financing
- Higher down payment.
- Monthly payments are higher than lease payments
- You will have cash tied up in the car.
A company involved in the transport business or any other business that requires a fleet of trucks in its daily operation is always looking for options to finance, rent, or lease commercial trucks. The decision to rent, lease or finance your next commercial truck may not necessarily be based on one choice. Most commercial fleet owners usually use a combination of all. According to the National Private Truck Council, about 60% of them own their trucks, while around 40% lease a portion of their assets.
There can’t be one answer for all businesses. Which option is better depends on the requirements of every business. What may work for one type of business may not necessarily work for another. If you have the funds to make a large deposit in order to save on monthly bills, buying or financing your next commercial truck should be the most feasible option for you.
If, on the other hand, you are a new business owner, you would want to go for the option of renting a commercial truck to test the waters and to determine which model or truck would work the best for you. It would also allow you to assess how the business fares before making a huge investment. However, if you do not have a lot of capital at your disposal to invest in a truck, you may want to go for the option where you have to pay less every month without any upfront costs.
At the end of the day, however, there might be other things that a business may consider such as its own goals and its strategic planning. A business may even want to finance a truck outright but may not have the credit score or creditworthiness to be applicable for financing. As such, the situation varies from business to business and there is no one-size-fits-all solution.