Should your business lease or buy an EV fleet?
Many fleet managers have already recognized the economic, environmental, and reputational benefits of transitioning their fleets from conventional to electric vehicles (EVs). The dominant question that remains is how they should structure the finance for these new vehicles.
As a fleet manager, should you purchase or lease your EV fleet? Both have benefits depending upon your company’s size, goals and budget. In this article, we compare the two options and break down their different advantages.
Purchasing – the Basics
Purchasing your EV fleet represents a capital investment that will sit on your balance sheet. The benefit is that as you pay off the purchase costs, you will gain equity that can be released back into the business. Small operators often prefer to purchase, so that they can get vehicle depreciation working in their favor.
Benefits of Purchasing EVs
Residual Trade-in Value
The greatest benefit of purchasing your business electric vehicle fleet outright is that at the end of the payment period, your business owns the vehicles and can therefore generate a financial return from their trade-in value.
If your calculations show that you will pay a similar amount to lease as to buy the vehicles within a typical lease period of 4 years, then consider how much you could make back by trading them in at the end of this period. By discounting that value from the purchase cost, drawn down over the same period, many operators find that purchasing works out cheaper for them.
Lower Maintenance Costs for EVs
Electric vehicles have significantly lower maintenance requirements than internal combustion engine (ICE) vehicles. Electric motors spin on channeled electricity, whereas internal combustion engines effectively contain a continuous explosion, and as such, electric vehicles have less heat and vibration to deal with. EVs also have fewer moving parts to potentially fail, and no oil or filters to replace. This makes maintenance costs outside of warranty much lower for electric vehicles, negating one of the financial benefits of leasing over purchasing.
If you purchase your EVs, you’re free to put your company branding on them. This allows you to create moving billboards for your business, and provides you with the reputational benefit of highlighting to your customers and potential customers that you are a responsible operator that has gone electric.
Finally, mileage limit is a common feature in lease contracts that you don’t have to worry about when you purchase your EV fleet.
Leasing – the Basics
Leasing is classed as an operating expense, keeping your company’s credit lines clear. When you are considering leasing your EV fleet, take the time to research whether an Open-end TRAC or Closed-end lease is the right option for your business. Watch out for hidden extras for early termination, extra mileage and extra wear and tear – all of which will be stated in the lease contract.
Benefits of Leasing
Bypass the Fast Rates of Depreciation
The famous American industrialist, J. Paul Getty, once said: “If it appreciates, buy it. If it depreciates, lease it.”
EVs are currently suffering from faster depreciation rates than those for conventional vehicles. According to the auto analytics firm Black Book, electric compact cars bought new in 2014 were worth only 23 percent of their original sticker price by 2017, compared with 41 percent for comparable internal combustion vehicles.
This difference is being driven by rapid developments in EV technology, with upcoming models predicted to far out-perform current models in regards to battery longevity, range and price.
These improvements lead to poor demand for electric vehicles in the used market, worsened by the fact that tax incentives are granted for new vehicles, not pre-owned. On top of this, is the widespread uncertainty as to how well the first wave of electric vehicles will age.
Leasing won’t leave you with the problem of how to shift your old EVs after 4 years, if depreciation rates continue at current rates.
Freedom to upgrade
The cost of batteries is falling fast (by an annual average of 20 percent, according to Bloomberg New Energy Finance), and with this, so is the cost of electric vehicles. Leasing allows you to upgrade your fleet in a few years time when the market is larger and prices are lower.
Leasing also gives your business the ability to benefit from the rapid technological progress in this market, especially with regard to battery longevity, charging time, and range.
Upfront Benefit from Financial Incentives
Financial incentives such as the $7,500 Federal tax credit for electric cars go to the owner, which when leasing, is the finance company holding the lease. Dealers can apply all federal, state and local incentives to the price of a lease, lowering the monthly payments immediately. In comparison, when purchasing, you would have to wait until the end of the financial year to apply the tax credits.
Warranty is generally included until the end of the lease term, giving you peace of mind if any vehicles in your fleet require major repairs, and making it less necessary to have the internal capabilities to maintain your vehicles.
The decision to lease or purchase heavily depends on how long you want to keep the electric vehicles for. If you want to upgrade your fleet every 2-3 years, leasing will probably be more cost efficient for your business.
If you want your business to be able to benefit from the latest technological developments in the EV market, then leasing again looks like the best option (and may explain why the majority of EV owners lease their vehicles).
When a business purchases their EVs, they must cover the upfront costs associated with the down payments, including tax and licensing, often resulting in decreased available capital. However, for fleets with the infrastructure to service their own EVs (a much smaller task than servicing ICE vehicles), owning can keep vehicles on the road longer than average. This can result in the business having outright ownership, eliminating a monthly payment.
FleetCarma Electric Vehicle Suitability Assessment (EVSA)
Regardless of whether you decide to lease or purchase EVs for your fleet, you need full confidence that the vehicles you choose will be the best operational fit, and that they’ll deliver your business the best ROI.
FleetCarma’s EVSA is the only solution that allows you to accurately forecast your fleet performance before EV deployment.
FleetCarma collects high-quality vehicle-side data across your fleet, analyzing and running efficiency diagnostics to produce a final report. This lets you forecast the effects of your purchasing decisions and supports budgetary decisions by accurately forecasting ROI, allowing you to:
- Forecast fleet wide savings
- Understand the total cost of ownership per vehicle
- Evaluate multi-year procurement plans, tailored to your fleet
- Forecast the reduction of GHGs based on possible fleet compositions
Whether you lease or purchase your new EVs, it is paramount that you have sound operational and financial justifications. FleetCarma’s EVSA provides you with all the data you need to support your decision, before you make the investment.