For fleet operators, acquiring vehicles comes down to two primary options: leasing or buying. Fleet leasing offers financial flexibility, maintenance coverage, and access to newer models, but it also comes with limitations. Before deciding, it’s important to understand how fleet leasing works, its benefits, and its challenges.
What is Fleet Leasing?
Fleet leasing gives businesses access to the vehicles they need without the massive upfront investment of buying. Instead of owning, companies rent vehicles under a contract, typically for a set period or mileage limit. Leasing provides flexibility, lower initial costs, and access to newer, more efficient models—but it also comes with trade-offs.
There are two primary types of fleet leasing: operational leasing, where maintenance and vehicle disposal are handled by the leasing company, and financial leasing, which functions more like ownership with long-term commitments.
Operational Leasing
Operational leases, sometimes called “walk-away leases” or “retail leases,” are closed-end leases where the lessor (the leasing company) assumes the vehicle’s residual risk. If you choose this option, you return the vehicle at the end of the lease term and do not have to worry about potential depreciation or selling the vehicle.
Operational leases are usually set for a three-year leasing term and have set mileage limits. They may work well if you have predictable mileage needs and are comfortable with higher monthly payments to upgrade your fleet every few years.
Financial Leasing
Financial leases, or “equity leases,” are more of an open-ended lease, where the lessee (the fleet) assumes the residual risk of the vehicle. With this option, you will be responsible for selling the vehicle and bear any potential losses if the market value is less than the predetermined residual value. On the other hand, you will also be reimbursed for any profit if the vehicle sells for more than the residual value.
Financial leases typically have a one-year leasing term (with potential for going month-to-month after) and have more flexible mileage limits. They may be a better option for high-mileage fleets or those with unpredictable needs.
Benefits of Fleet Leasing
While there are plenty of advantages to buying fleet vehicles, leasing has many benefits, too. Here is a breakdown of the most fundamental advantages of fleet leasing.
Upfront Cost Savings
Leasing a fleet requires less initial capital than buying vehicles outright. You may be asked to put down an initial payment toward the lease term, which is substantially lower than a down payment on a purchased vehicle. From there, predictable monthly payments help you better manage budgets and cash flow. Lower initial costs leave more capital available to invest in other parts of your company that may need funding.
Maintenance & Repair Coverage
Many lease agreements include maintenance and repair services. This helps ensure the vehicles are always in good working condition and reduces the time and resources you have to spend on vehicle upkeep. The leasing company generally handles maintenance (and sometimes insurance), as they’ll want to protect their assets until the lease expires. And because the costs of unexpected repairs are baked into the lease, fleet budgeting becomes much easier.
Tax Deductions
Lease payments are often tax-deductible as a business expense, which can provide significant savings, even when compared to the depreciation write-offs of purchased fleet vehicles. Paying for a business expense with pre-tax dollars can be more beneficial than spending post-tax dollars, but may prevent you from using the standard mileage rate according to the IRS. Tax benefits vary by locality and lease type, so be careful to check with your tax planner before choosing a lease.
Ability to Scale
If you’re a fleet manager who is looking to grow, leasing allows fleet expansion without long-term financial commitment. Enterprise fleet leasing helps you easily adjust your fleet size based on current needs. If business picks up or slows down, you have the ability to quickly add or remove vehicles from the lease accordingly.
Challenges of Fleet Leasing
Of course, for all the benefits of leasing, there are some drawbacks to consider as well. Let’s take a look at the potential obstacles to fleet leasing.
Mileage Restrictions
Many lease agreements include mileage limits (restrictions on how many miles can be added to the odometer within a year), with financial penalties for exceeding these limits. Be careful to choose a lease that won’t be restrictive if you run a high-mileage fleet, and consider over-leasing when it comes to mileage if you think your business will grow rapidly.
Contract Limitations
Lease contracts usually limit or prohibit things like vehicle modifications, which some jobs or deliveries may require. You may be stuck with a vehicle that doesn’t fit your specific needs, with no way to modify it, until your lease expires.
Higher Long-Term Costs
Unlike a purchased fleet, leased vehicles will never be paid off. Continuous payments mean leasing can cost more over a vehicle’s lifespan. Plus, lease agreements often come with strict terms and conditions. Early termination of the lease, for example, can result in hefty penalties. Also, keep in mind that you’ll have no equity or asset value in your fleet, which means you won’t be able to borrow against it or resale it down the road.
No Resale Potential
With leasing, the company never actually owns the vehicles. You aren’t buying the asset, just renting it, so you can’t resale it or max out its life usage.
Leasing vs. Buying Fleet Vehicles
When it comes to deciding whether to lease or buy, the most important factors to consider are your available resources and fleet needs. Let’s examine some specific examples to see this more clearly.
When Leasing Makes Sense
If your company is in the early stages of development, with less predictable needs and a smaller capital budget, leasing may make more sense. Lower upfront costs, easier scaling, reduced maintenance burden, and visible line-item budgeting can empower a small or start-up scale company to succeed.
When Buying is Preferable
If your company has the cash on hand to invest in fleet vehicles, it may make more sense than leasing if you have specific needs or are looking to achieve specific long-term business goals. Ownership offers complete control over customization and eliminates concerns about exceeding mileage limits and incurring extra costs. Buying also gives you the ability to resale vehicles or max out their life usage.
Better Leased Fleet Operations with Omnitracs and Solera
Leasing a fleet opens the door to a world of opportunity and risk. To make the most of your investments, consider ways to maximize the potential in every mile. Omnitracs (now a part of Solera Fleet Solutions) offers advanced tools like dashcams and telematics to improve safety and performance, helping leased fleets perform at their best.
- SmartDrive—An Advanced Driver Assistance System (ADAS) AI-powered dashcam that can detect distracted driving, risky behaviors, and potential collisions, reducing accident risk. It gives fleet managers and drivers performance insight and analysis, helping to save fuel, expenses, and even lives.
- SmartDrive Protect—A video-based safety platform engineered to provide small fleets with critical capabilities at an accessible price. It allows for continuous video recording with both inside and outside views.
- Omnitracs Telematics—Telecommunications and informatics to collect, transmit, and analyze data from multiple vehicles. Telematics enables real-time tracking, performance monitoring, and data-driven insights that optimize fleet management.
Position yourself to manage a leased fleet in a profitable and safe way. Don’t go at it alone. Contact Solera Fleet Solutions today to learn how Omnitracs tools can help guide your leased fleet toward maximum profitability.