If your fleet is becoming a major business expense, opt for fleet leasing to turn that negative expense into a long-term, reliable asset to your business. You might think that fleet leases are a one-size-fits-all solution that doesn’t recognize the unique factors that go into your business. That couldn’t be farther from the truth. The two main types of leases you will find at professional fleet management companies, like Glesby Marks, are operating leases or capital leases. By learning about the key differences between these two lease categories, you can approach your fleet leasing experience with full control and confidence.
Deciding between these two lease types is something our team at Glesby Marks is an expert on. Aside from the management and operational aspects of fleet leasing, at its core is a financial element that truly sets it apart in terms of efficiency and savings. Use this blog as your guide to navigating the differences between Operating and capital leases and what they can do for your company’s bottom line.
The Operating Lease: The “True Rental” Approach
Operating fleet leases offer maximum flexibility for businesses that are looking for a cut-and-dry approach to their operation. An operating lease means that a company rents its fleet for a specific period, normally several years, without taking on any type of ownership in any way. The monthly payments are fixed – meaning that you don’t have to face unpredictable costs or upfront bills. This means that our team not only covers all maintenance costs, but we can also help you upgrade your fleet throughout the rental period if you see a need for newer equipment or different solutions.
Operating leases are ideal for companies that:
- Need to prioritize flexibility
- Value low initial costs
- Want constant access to personalized fleet management services
Financial and Account Aspects of Operating Leases
What matters most for most companies when it comes to selecting the type of lease they enter into is the effect it will have on their budget. While as a whole, leasing can offer more predictable costs and lower upfront fees, operating leases come with a separate variety of major financial advantages.
The first financial aspect of operating leases is their off-balance sheet setup. The biggest difference between operating leases and other contracts is how they are documented on your company’s financial statements. Because you don’t own the vehicle, your fleet is listed as an operating expense. For many businesses, this can improve their balance sheet’s financial ratio and make your company look more impressive to potential investors. Fleet leasing is geared toward your company and making your operation shine, regardless of how you want to reflect it on your documentation.
Along with how your fleet payments are documented, your monthly payments in an operating fleet lease are based on the vehicle’s depreciation over the full lease term. This is different from other types of leases that base this figure on the specific vehicle’s full value, not factoring in depreciation over the course of the lease. Because of this, operating leases are often lower each month and can be an excellent way to free up your budget.
The Strategic Advantage of Operating Leases
The financial aspect of operating leases is empowering to your company as a whole, and so is the operational efficiency that comes with it. At Glesby Marks, we help your company increase productivity with our fleet management services that include:
- Simplified management: For many companies, operating without fleet leasing can result in significantly higher administrative costs than they had expected. Because operating fleet leases often come bundled with vital services such as maintenance, repairs, and licensing, you can cut back on your need for in-house administrative work. Let our team of experts help you achieve optimal productivity without lifting a finger.
- Reduced risk: Owning any vehicle can be a large risk, but that risk grows larger when you’re taking on an entire fleet. By choosing fleet leasing over vehicle ownership, you can reduce your company’s risk of unforeseen costs such as repairs, accidents, or other issues. The value of the car will have no effect on your bottom line, and at the end of your lease, you simply return the vehicle, regardless of how much its worth has decreased.
- Constant fleet modernization: Operating leases are the top-tier option when it comes to flexibility. By choosing an operating lease, you can regularly update your lease to more efficient models, technology, and safety features as they hit the market.
The Capital Lease: The “Financing” or “Ownership” Approach
Some businesses are interested in building a long-term asset in their fleet, often geared toward owning the vehicles eventually. Capital leases are long-term financing agreements that companies treat as a purchase for accounting purposes.Most of the time, it is also considered a longer lease and occupies around 75% or more of the vehicle’s lifespan. Capital leases give the lessee a large part of the vehicle’s economic value throughout the leasing period.
The value of this is that the leasee can treat the fleet like an asset on their balance sheet, much like if they purchased the vehicle outright. Additionally, many capital leases also offer the option for the company to purchase the lease at the end of the contract at a predetermined price point, which is oftentimes significantly lower than the vehicle’s market value.
These terms combined make capital leases valuable for businesses that prioritize:
- Long-term fleet leases
- Having more internal control over their fleet’s operations
- A clear path to ownership at the end of a lease
Building Equity and Assets with Capital Fleet Leases
With capital leases, your fleet lease shifts from being a rental expense to being a long-term investment, which is the biggest difference from an operating lease. Capital leases allow your company to build equity and leverage tax benefits in your favor throughout the extent of your lease. This gives you the ability to enjoy the flexibility and dependability of fleet leasing, while also reaping the benefits of owning.
Unlike operating leases, capital leases list the fleet as both assets and liabilities on the balance sheet. Because your company treats them as a purchase, they become a portion of your company’s assets. If your goal is to accumulate assets, capital leasing can be a valuable tool.
Another factor to consider is that most capital leases present slightly higher monthly payments due to accounting for the full price of the vehicle, without factoring in depreciation. However, over time, this can eventually build up your equity to the point that you own the asset or only have to pay a small fee to secure ownership.
Looking Past the Balance Sheet: The True Value of Choosing a Capital Lease
Deciding between capital and operating leases ultimately comes down to financing and the unique long-term goal of your business. The key factors to consider when choosing a capital lease with Glesby Marks include:
- Greater control: This is because you are the symbolic owner of the vehicle, meaning you have full control of maintenance decisions, repairs, and any modifications or customizations needed to optimize your fleet. If your business has precise operational needs to meet its goals, this control can be a real advantage.
- Residual value control: Because capital leases allow you to retain the value of a vehicle at the end of the lease, it not only incentivizes you to maintain it well – but can also offer a payout at the end of the lease.
- Tax benefits: Since capital leases allow you to use your fleet lease for tax deductions for interest on payments and the depreciation of the vehicle, it can give your company savings in the long run.
Choosing the Right Fleet Leasing Solution for Your Company
Regardless of your company’s specific needs, Glesby Marks has the perfect solution for you. Deciding between operating and capital leases isn’t just about finding a better fit; it’s about optimizing your business and increasing productivity by working with our team of experts. Contact Glesby Marks today for a free fleet leasing consultation!