There are two ways to buy a vehicle for your startup — lease it or purchase it outright.
Considering that most startups and small businesses begin their journey with a capital of only $5000 or less and the average price of a vehicle is $10,728 per year, leasing a car is clearly the wiser choice for most startups.
But is it really? How do you know if you need a business car yet? And what's the actual financial impact of leasing a car?
In this post, we'll answer these questions in complete detail. Read through and make an informed decision!
Do You Really Need To Lease A Car?
Having a vehicle to impress clients and competitors may sound tempting, but this temptation could cost you everything you've built so far. Remember, 44% of startups ran out of cash in 2022, which made poor financial planning one of the three major reasons for startup failures.
So, consider your business needs before you decide to lease a vehicle.
The good news is that if you have an online startup, you don't really need a vehicle, even if you've got enough funds. But if you have a physical startup that involves moving to and fro, ask yourself the following questions:
- Will the car cut down costs for delivering products/services?
- Will it help transport products and goods at a cheaper rate?
- Do you need a car to meet clients frequently or travel to different locations for business needs?
If you answer positively to any of these questions, proceed to the next section. But if none of these seem to be the case for you, head over to a more detailed guide on the pros and cons of buying a car for small businesses.
Alternatives Of Car Leasing
If you really need a car for your business and both leasing and buying it outright seem to be out of your budget, consider the following options:
- Used cars: Used cars are less expensive than new ones, and you can often get a good deal if you're willing to do your research. While you won't have the latest features or the same warranty as a new car, a used car can be a more affordable option for startups.
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Shared transportation: Services like Zipcar or Car2Go allow you to rent a car by the hour, which can be more cost-effective than leasing or purchasing a vehicle outright. Additionally, public transportation or ride-sharing services like Uber or Lyft can be a good option for startups that don't need a vehicle on a regular basis.
- Hire purchase: If used cars or shared transportation don’t cut it and you absolutely need a new vehicle, you can also consider a hire purchase agreement. It’s similar to leasing with a few minor differences that you can learn about here.
The Impact Of Car Leasing On Startup Cash Flow
The reason most small businesses and startups consider leasing a car is that it allows you to get an expensive car at low monthly payments. Since there's no upfront cost or down payment, you don't lose a chunk of your precious capital. And in some places, leasing a car may also mean a reduction in taxable income.
But does that mean you save cash and get to keep a car? Is it really that easy? Well, not necessarily. In a few cases, it could serve as a trigger to your startup's decline.
For that reason, evaluating the long-term impact of car leasing on your startup's cash flow is essential. We recommend considering the following factors:
1. Effect On Monthly Expenses
Although lease payments are typically low, they are still recurring expenses that you'll need to accommodate in your monthly budget. So, when considering a lease, make sure you accurately forecast the monthly payments and factor them into your budget. Additionally, exploring options for dealing with a junk car with lien could provide financial flexibility, especially for startups aiming to manage or clear existing debts.
2. Associated Fees
There are several associated costs when it comes to a car lease. These include:
- Lease origination fee
- Security deposit
- Disposition fee
- Excess mileage fee
- Excess wear & tear fee
- Early termination fee
Collectively, these associated expenses could add up to a few thousand dollars and negatively impact your cash flow. So, make sure you have room for these in your budget so you don’t end up in a difficult financial situation.
3. Expected Mileage And Usage
If you use a leased car excessively or damage it, you'd have to pay a significant compensatory sum along with the monthly lease payment.
Since you have a startup with minimal savings and a monthly revenue that you depend on, there's a chance this expenditure could adversely affect the next month's business activity and set a negative business trend in motion.
Hence, it's highly advisable to predetermine the mileage and usage of the vehicle you lease. If you're not personally looking after the vehicle and it's used by multiple people, hire a dedicated employee to take care of the vehicle. It would be an additional expense worth a few hundred dollars, but it would save you from losing thousands.
End Note
Summing up, leasing a car for your startup can positively impact your cash flow by bridging the gap between you and money-making opportunities as well as helping you save if you're spending unreasonable amounts on transportation.
But it can also negatively impact your cash flow if mishandled, such that your outgoings exceed your incomings. So make sure you weigh your situation thoroughly and make a data-backed decision.
