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Financing models: Ways to procure cars for your fleet

Mobility needs in Germany is rising and with it the urgency for companies to maintain vehicle fleets of their own. There are now around 1.6 million fleets in Germany with over 4.5 million vehicles. The tendency continues to head up.

Procuring, coordinating and managing a fleet is a major investment that needs to be well thought out. Whether it be leasing, purchasing, corporate carsharing or rental – choosing the financing model can have a major impact on a company’s spreadsheets as well as its liquidity. Which option is the right one? It depends on the individual needs of the company.

Whether through purchase or financing, the car ultimately becomes the property of the company. With leasing, the company car is rented for a contractually-agreed period with the option to buy at the end of this period, less the installments already paid. Corporate carsharing or rental is frequently used as an additional form of procurement, for example to expand the vehicle pool at short notice.

In this post we will lay out the four different financing options to help you make your decision.

Leasing

To safeguard liquidity, ever more companies are opting for leasing. This ensures the fleet is always kept up to date, i.e. older cars are replaced by new models from the leasing company. What’s more, the OCF tax from the monthly installments can be deducted. After a predetermined time, the leased vehicle can, depending on the contract, become company property. A leasing agreement usually has a term of two to four years. An early exit is usually prohibited. Though leasing might offer a reliable basis for calculation and planning, it is not the most cost-effective option.

In most cases, companies must take out comprehensive insurance for their cars. This can be particularly problematic in the event of a total loss. Though the company may then issue an extraordinary termination, it is still liable for the prepayment penalty.

When leasing a company car, a distinction is drawn between mileage leasing and residual value leasing. With mileage leasing, an allowable upper limit on the kilometers driven is agreed. Here, the leasing company bears the sales risk. With residual value leasing, an estimated value on the car is set for when the lease term ends. If at this time the assessed value is greater than the pre-estimated value, the lessee is entitled to money back. Though it’s fair to say this rarely ever happens. What’s more likely is that additional payments must be forked over. In short, residual value leasing –at first glance appearing to be the cheaper alternative, does involve unforeseen risks that fleet operators increasingly want to avoid. Mileage leasing, in contrast, is easier to calculate.

The software solution Easy uses a multi-supplier strategy to compare the variety of leasing conditions in order to tease out the most effective cost savings for your company.

To buy or to finance

In contrast to leasing, installment payments on a purchased car are not tax deductible. Though the full input VAT on the purchase price that is paid at the outset may be recouped through tax deduction over a period of six years while the car is in service. Interest payable can also be deducted as business expenses. After the car has been paid up, it becomes the property of the company. It should be noted here that longer contract terms are less disadvantageous than with leasing, as longer terms result in lower installment payments. Another thing to keep in mind is the profit from the sale of a company car is taxable.

The company bears the risk of having to sell the cars it purchased at a price lower than planned. Furthermore, the cost of the purchase has a direct impact on a company’s liquidity and, in the case of credit financing, the equity ratio. Nevertheless, buying can be worthwhile if, for example, it is unclear how frequently a car will be driven. Another advantage is that the car can be equipped to specific requirements.

Rentals

Renting cars are usually more expensive than leasing. However, if a company’s demand for cars fluctuates, long-term rentals can be advantageous: vehicles may be returned upon expiration of the minimum rental period while this option affords the company a high degree of flexibility. If a company car is needed only for a few days, a short-term rental may be preferable: short-term rental refers to a period of up to 27 days. Further advantages are transparency of costs, reliable planning and practically zero administrative effort, which is carried out by the lessor – the owner of the vehicle. The one downside of long-term rental is that cars cannot be customized.

Corporate carsharing

Corporate carsharing cannot replace an entire fleet, instead it serves as an added feature, compensates for peak periods and makes commuting easier. This can be fulfilled by an external provider. There are public, station-bound and commercial fleets. You can read what other advantages corporate carsharing offers your company in our blogpost.

In a nutshell: picking the right financing model for your fleet

Which financing model your company chooses will depend on your firm’s needs and strategic orientation.
For larger enterprises – with extensive fleets, leasing is an attractive option. It provides a high degree of planning reliability while administrative expenses can be outsourced.
Medium-sized companies – usually prefer to finance their fleets.
Companies where vehicle needs fluctuate greatly can benefit from long-term rental. Corporate carshare, on the other hand, cannot completely replace a vehicle fleet and serves much more as an adjunct to an existing fleet.

There is no one-size-fits-all solution to the question of the most effective financing model. Which option you choose depends on how your fleet is organized, the budget and long-term strategy. As an expert in fleet solutions with nearly 30 years of experience in the market, we are the right people to help you find the model that best fits your needs.

Let us consult with you on the various financing models.