Understanding Leases: What are the Options?
Company-provided vehicles remain the safest, most cost-efficient method of providing transportation to employees who must travel, meet and greet customers, and deliver and service products. A company can provide such vehicles in two ways: through ownership or a lease arrangement. For more than 30 years, leasing has been the method of choice for most large fleets and remains so today.
Companies lease for a number of reasons including administrative ease, balance sheet considerations, or conservation of capital. Several lease options are available for fleet vehicles; however, two methods have dominated the industry: the closed-end or net lease, and the open-end TRAC lease. Here are the basics of each, how they work, their respective advantages and disadvantages, and what might be a sea change in how one option is treated.
Why Companies Choose Leasing vs. Ownership
Companies choose to lease vehicles rather than buy them outright for a number of reasons:
- Conservation of capital. Rather than using capital to acquire depreciating assets such as vehicles, leasing frees a company to invest that capital for a return.
- Accounting treatment. Purchasing not only uses valuable resources, but burdens the balance sheet unnecessarily with assets and offsetting liabilities. Leasing, when properly structured, allows a company to expense lease payments.
- Administrative ease. Owning vehicles requires administration of titles, registrations, and all other tasks associated with ownership of titled assets. When vehicles are leased, these tasks remain with the owner — the lessor — simplifying the process substantially.
- Ancillary programs. In addition to ownership's administrative burdens, a fleet leasing program can be bundled with other important fleet management services, such as maintenance, accident management, and fleet administration, into a single, overall program. One source, one bill, one payment.