If you are in the trucking business, or want to get into this line of work, you will need to acquire trucks. You can either buy or lease trucks. It is important to note that there are many truck financing options available to business owners. You can even apply for it at companies like TruckFinanceOnline. You just need to do some research to identify the best truck financiers, choose the right truck, submit your application and get the truck you need to run your business profitably. Finance lease and operating lease are two truck finance options every business owner should know about. You may be wondering which option is best suited for trucking businesses? Keep reading to find out.
Finance Lease Explained
A finance lease in short is a lease-to-buy type of rental agreement for an asset. The business owner selects an asset, the lessor buys the asset and allows the business owner to use the asset in the day to day running of their business. In return, the business owner will have to pay a lease fee or rental fee for the duration of the lease contract. The rental or lease fee can be paid in installments, either monthly, quarterly or annually. Whatever the case, ownership of the asset is transferred to the business owner after the last installment is paid successfully. This is a great option for trucking businesses as the business not only gets possession of the truck, but also ownership at the end of the lease when all lease payments have been paid. During the lease period, the lessor will recover not only the capital invested, but also interest on the principal amount. Therefore, it is a win-win type of truck financing. Finance lease is very similar to hire purchase because the end result is that the lessee gets full ownership of the truck after making the last payment. In case the lessee defaults on payments, the lessor cancels the finance lease and takes possession of their truck. This means the lessee will lose not just the truck, but also all the payments made so far. Please note that a finance lease agreement is usually referred to as a loan agreement.
This is the traditional or normal lease contract that most people are used to. The business owner selects an asset, the lessor buys the asset and retains ownership rights without the intention of ever transferring ownership to the lessee. However, the lessee gets possession of the truck and can use it in their trucking operations. In return, the lessee has to pay a lease fee either monthly, quarterly or annually. At the end of the lease contract, the lessor takes possession of the truck unless the business owner wants to extend the lease. In many cases, however, business owners usually opt for newer trucks, which are more efficient and break down less often.
Which Option is Cheaper?
In terms of lease fees or payments, the operating lease is the cheaper option. This is because the lease fee is competitive as there are many other companies that offer trucks for lease. An operating lease is also cheaper because the contract can be cancelled at any time. For instance, a business owner can lease a truck to use for a short period until they are able to buy their own truck or repair a damaged truck. This can be for a few weeks or months. However, they can decide to cancel the lease at any time depending on the terms and conditions of the lease agreement.
With finance lease, however, the lease cannot be cancelled. The term of the lease is also fixed and spans the useful life of the truck. It is a little bit more expensive than an operating lease because the value of the truck is divided by the number of years of useful life of the truck and interest added onto the payments.
Which Option is Better?
When analyzing the two options, the needs of the business have to be considered. If a business wants to acquire trucks which will eventually belong to the company, a finance lease will be the best option. Please note that finance lease agreements usually provide the lessee with the option of purchasing the truck at a price that is below its current market valuation. This is one of the reasons why finance lease agreements are considered the better option.
If you require one or more trucks to use temporarily until you buy your own, an operating lease would be the best option as you can cancel the lease when you’re able to buy your own. If your business collapses, you can simply terminate the lease contract at no cost. After all, lease fees are usually paid in advance, so if you fail to pay, the lessor simply takes possession of the truck.
As far as taxation goes, depreciation of the truck is a tax-deductible expense in a finance lease. The payments made to the lessor are also tax deductible. With operating leases, only the lease fees are considered tax deductible expenses. Depreciation will be claimed by the lessor as they own the truck.
In a finance lease, the business owner technically owns the truck and has to maintain it and carry out repairs in case of a breakdown. With an operating lease, however, it is the duty of the lessor to maintain the truck.
Both finance lease and operating lease have pros and cons that business owners need to understand. This will help them make an informed decision on which option is best suited for their needs. It is important to note that a finance lease is a long-term contract while an operating lease is a short-term contract. Therefore, if you need a truck for the short term, the latter would be a more suitable option. If you need a truck for a long period of time, a finance lease will be the best option as it also provides you with the option of purchasing the truck at a discounted price.