Pros & Cons of Buying a Vehicle for Your Small Business

So, your small business is ready to get on the road! Whether you have a business geared at delivering goods or need to use a company car for transportation to and from meetings, it might be the right time to consider buying a vehicle.

Yet, a vehicle is a large purchase. Timing can also be critical to the operations of a small business. Depending on the size of your business, too, you might have some concerns about how this would affect your business. Tax implications from the IRS could be a benefit to your business, but if you use it for personal use as well, there might be concerns about the tax and cost implications on the company. Or, there might be great perks of having a company vehicle for your small business, but there could also be a large upfront cost or maintenance cost associated with its upkeep.

As with any large purchase for your small business, it would be wise to assess the pros and cons of a large potential deployment of capital. Simultaneously, you should also keep in mind the overall goals of your business and what you intend to achieve in the near term and long term. In this post, we’ll cover the following in detail:

Making the Decision of Whether to Buy a Car for Your Small Business

One of the first questions you should ask yourself is if a business car is really necessary for your business. The key factor for deciding whether your small business should purchase a car would be the frequency with which you use something another option in the present, like a personal vehicle.

While this might make intuitive sense, some people believe that they should get a business vehicle for the write-off benefits from taxes. Actually, this is a misconceived notion, as there are also ways to get tax deductions from using your personal vehicle for business. Thus, you should consider just how frequently you use your personal vehicle for your small business before continuing to think of the pros and cons of purchasing one for your business.

Making the decision to buy a car is not the only option if you frequently use a car for your business. Instead of buying a car outright, it is possible to lease a car. The advantage of leasing a car is that you can usually keep a relatively new car for your business. The payments you will have to make on a lease are lower, which gives your business greater flexibility with the unused cash. Moreover, the amount of risk you are taking on with lower monthly payments is lowered.

At the end of the lease, you can either turn in your car or buy it from the leasing company. This will depend on the lease and the leasing company. If this option sounds appealing to you, it would be a good idea to investigate it further rather than continuing with buying a vehicle outright. In any case, some of the same pros and cons of buying a vehicle might apply to leasing a vehicle.

The Pros & Cons of Buying a Vehicle for Your Small Business

At its core, the decision to buy a vehicle for your small business should come from a careful consideration of the benefits and drawbacks of doing so. As you read through, you should take note of the pros and cons especially relevant to your small business’s situation.

Pros

Liability

Liability is one of the major reasons to consider getting a company vehicle instead of using personal vehicles for your small business.

If you are driving your personal vehicle around and you happen to get into an accident, your personal insurance will have to cover the damages and costs. This is one of the largest disadvantages of using a personal car for your small business. However, if you have a company car and use commercial auto insurance, you will be covered by the commercial insurance, even in the event that you are driving the car and are responsible for the accident.

Tax Benefits

A large benefit to having a company car is the tax benefits that come alongside it for small business owners. If you either own a car or have a car lease, you can get the cost of the purchase or the lease deducted from your tax obligations. Yet, the advantages do not just stop there. When you need to repair, maintain, or insure the company car, all of these expenses are tax-deductible.

If you are anticipating traveling with the company car, all of your expenses related to your tax-deductible travel can be tax deductible. This allows for important tax advantages for your business.

Overall, this can give you great savings for your business. It provides you with an area to recuperate some of the sunk cost of purchasing your small business vehicle.

Ease of Use

Another reason to consider purchasing a vehicle for your small business is the ease of use of the option. Getting a company car provides a potentially more reliable option for business transportation and travel. If your personal car has reliability issues, a newer or more improved model of a company car may be exactly what you are looking for in a car. It can give you peace of mind while traveling to business meetings and conferences without the same worries that come along with using your personal car.

Moreover, if you have a family at home and have a limited amount of cars at home, a company car may provide greater flexibility in your personal and family life. You could use the company car instead of a personal car for business, placing less of a strain on trying to organize different people using different cars at the same time. This option might create less hassle for all those involved in your business-workers and otherwise.

Employee Benefits

In a way less commonly thought of, a company car can also make for an attractive employee benefit. While there are many ways of showing appreciation for your employees, giving them a company car or having them use a company car could be a great way to provide a benefit that is also very beneficial to the business.

Unlike bonuses or increased paid vacation, a company car could be a cheaper option than having your small business reimburse employees for expenses that employees incur on their personal car while working. It is also tax deductible for the business. Depending on the car you give them, it could be electric or have a better fuel economy, contributing to the company’s goals to be environmentally friendly.

Having a company car can also help customers who need an employee to assist them on-site. If you are having difficulties associated with arranging transportation, purchasing a new vehicle for the company could greatly increase your small business’ capacity to do so.

If you are interested in potentially increasing employee benefits at your small business, a small business vehicle could be a great option. For employees, a company car could lower the costs of their commute, car maintenance, or auto insurance when trying to get to, from, or be at work. This could make employees happier, which could contribute to increased productivity or retention at your small business. Moreover, a perk like this could increase the likelihood of potential employees being attracted to join your small business.

Financing Options

When you are buying a car for your small business, you have financing options for your car through your company. You can leverage your company credit to get a loan on the company car. If you are able to be good about making payments on time, then your company credit can increase. This would be helpful for buying future business assets like offices, property, heavy machinery, or other things that would require you to finance. The vehicle that you purchase from a dealership takes the place of collateral for the loan.

Cons of Buying a Vehicle for Your Business

High Costs

Some of the biggest cons of purchasing a vehicle for business use are the large business expenses it incurs. For one, the upfront cost of purchasing any type of vehicle is not small. If you purchase a vehicle with cash, there is a large opportunity cost of capital. That capital could be deployed in a way that potentially helps your business more than spending it all outright on a business vehicle, especially if your business does not frequently require its use.

Another common method of purchasing a car for your company requires the use of debt. The upfront cost of the downpayment certainly presents an opportunity cost of capital, but it also creates a substantial liability on the balance sheet of the business in the form of a car loan.

This liability is contained in the outstanding monthly payments on a car loan the small business will have to make. If the small business has seasonal revenues or varied revenue, this could become a problem for the small business to meet its debt obligations.

Aside from that, there are other financial downsides to having a separate vehicle for your small business. You will have to acquire separate car insurance for that vehicle. Your small business will also have to assume financial responsibility for the car’s repairs, inspections, and fuel costs.

Credit Risk

There is another risk to a loan for a small business vehicle as well, in that it puts your small business credit or your personal credit on the line for the loan. If you anticipate potential problems with cash flow in the future, this could be a risk that is not worth it.

If you or your small business will be affected by your credit scores, this should be a serious consideration given the large purchase you are about to make. Particularly, your credit influences your interest rates and access to credit and loans. This is an important decision to get right for both you and your small business’s future.

Liability Transfer

While one of the advantages of buying a company car is that it shifts your liability from your personal insurance and you to the small business and the company auto insurance policy, it is also true that the liability to the small business increases, especially as that car is used more. While this liability is transferred to the business and no new liability is necessarily created, it is important to consider and evaluate this transfer of liability in the context of deciding whether to purchase a vehicle for your small business.

Deciding on a New or Used Vehicle

If you are looking into buying a vehicle for your small business, you might wonder whether you should buy a new car or a used car. Similar to life outside of your small business, buying a new or used car also has pros and cons. They are especially important to consider in order to make the best financial decision.

Considering a New Vehicle for Your Small Business

One of the great parts about buying a new car is the warranty. Since new cars often come with warranties, you can rest assured knowing that you will not have substantial issues with maintenance or upkeep. Your small business vehicle will be reliable in taking care of client needs while having the peace of mind that it will be a long time before you have to worry about problems with the company car. In a certain sense, this could lower some of the maintenance costs associated with a company car.

New cars are also more environmentally friendly. They usually have better standard mileage rates and eco-friendly technologies that improve a company’s environmental standing. Moreover, this improved fuel efficiency and technology can contribute to company savings.

While new cars are going to be more expensive than used cars, they may still be affordable for your small business. If you believe that they are the best choice for you, you can explore options for leasing or buying a new car for your small business. That makes the expense cheaper in the first year relative to the purchase price. It also provides you with a more affordable way to pay down the car alongside the incoming cash flow from your small business. While the actual expense might differ due to the interest, your small business may have pertinent needs which could justify the use of lenders to make the purchase possible. In any case, you should decide based on the unique needs and considerations of your small business.

A new car, however, comes alongside serious depreciation. Recovering the cost of your new car for your small business would be hard or impossible immediately after you bought it. Depreciation would quickly set in. Unless you get substantial value from the use of the vehicle for your small business, a new car may not be worth it in its initial loss of value from depreciation.

The purchase of a new car will be more expensive than its equivalent model of a used car. The insurance and taxes on this car will also be higher from the purchase. Unless there is a specific reason you are considering buying a new car, you might consider buying a used car for your small business. It can save you a lot of money and allow you to access many of the benefits of having a company-owned automobile.

Considering a Used Vehicle for Your Small Business

Used cars are less expensive. In the upfront cost, used cars are certainly cheaper. The taxes you will pay on the purchase are smaller. Moreover, the insurance, all things equal, will be more affordable. A lot of this is concentrated on the depreciation effect on a new vehicle. Since the most rapid depreciation is absorbed by the initial owner of the vehicle, the car is now cheaper for your business to buy and pay bills on. This may be counteracted by maintenance costs, but this will likely be more of a factor depending on the type and condition of the vehicle you eventually select.

Selecting the right used car for your business can be difficult. If you choose the wrong one, you might not get the value out of it that you initially intended to. That might depend on the model of the car you select, or it could depend on the unknown conditions of the car. It is likely best that you consider getting a used car that has passed a thorough inspection. You do not want to end up making such a large purchase for your small business, which later creates problems.

These problems could be in the maintenance and upkeep of a used car. These problems are not just related to cost but also to logistics. If you have a used car that requires being serviced, you must figure out a way to get the used car serviced. That might take up additional time or employee resources. On top of that, you will have to expect that the used car will be unable to help the small business accomplish its work duties during the time it is being repaired. While in certain cases, this might only last for hours, in others, it could last for days or weeks.

There are certainly pros and cons to buying new and used cars. The right type of car will depend on your unique situation. Careful consideration of your situation will help you make this decision and begin your search for the perfect vehicle for your small business.

Steps to Buy a Vehicle for Your Small Business

If you decide to buy a company car, there are a few things you should consider. One of the first is setting up your budget and spending decision the right way so that you can get the most value out of the money you will spend. You should begin by separating your personal finances from your company finances. You will want to ensure that your small business is able to reap the tax benefits from the motor vehicles that you purchase. As a prerequisite, you should make sure that the purchase is coming from your small business the entire way through the process.

Considering your price range is one of the most basic and important steps. If you spend too much on a company car, there is a substantial opportunity cost that will be created for your small business. That capital could have gone to acquiring more employees, increasing inventory, or other business purposes.

You should also consider the size of your deployment of capital against things like depreciation with a car for your small business. You should select a car that is right for your uses in terms of both price and quality. Questions about what you are looking at buying would be important. Some of these could include whether a used car might be right for your small business or how much you expect car expenses to be.

You should also consider the form of financing which is best for your small business vehicle. Choosing between lease payments and loan payments can be intimidating, but by considering the right options for your business, you can extract greater value and save more money.

When you are ready to select the right car for your small business needs, you should think about the best vehicle which suits your small business. For some, a regular car is all that is needed in order to get from meeting to meeting. However, if you run a landscaping business, for example, a company truck might make more sense. If you are used to delivering packages or larger items, a van can make sense in many cases.

Since you own or are running a small business, choosing the right kind of car or truck is essential. You are going to be making a large purchase, especially relative to the size of the business, so getting this decision right is important.

After you purchase a vehicle for your small business, it will be important to use it in a way that maximizes revenue. You might consider getting a wrap for your vehicle or another form of a sticker to advertise your company. If you or your employees are driving around in the company vehicle, it can serve as a form of billboard advertising. It can provide potential customers with handy information on your websites, social media, and contact information. It can also increase the professional look of your small business in the local community.

Takeaways

As a small business owner or manager, careful consideration of the pros and cons of purchasing a vehicle is needed. Pros and cons of buying a vehicle are not just limited to the idea itself but also in the decision to buy or lease, to get a new or used car, and in the steps, you take to execute the buying decision.

Biz2Credit

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