Welcome to the ‘Sam’s Story’ series, where we cover common accounting topics in a real-world scenario. This week we’re talking about whether you should lease or buy a car for small business owners.
Sam’s Story Recap
If you haven’t read any of our previous Sam’s Story articles, catch up on them now!
Sam’s Story Part One: Selecting a Business Entity for a New Business
Sam’s Story Part Two: Accrual vs Cash Accounting
Sam’s Story Part Three: Subcontractor or Employee?
To Lease or Buy a Car for Small Businesses
Sam called me one day last week with a question that he had been thinking about. His business, Sam’s Sports Bar, LLC, had been open for a few weeks, and business had been booming. He had a great location and the concept of a sports bar in that particular area was right. He found that, in addition to managing the restaurant, he was doing a lot of running around for business purposes, such as meeting with his bank, suppliers, and potential business customers, along with more routine things like doing the banking, getting postage, etc.
As a result, Sam decided that the time was right to get his first company car. He had been talking to one of the local car dealers, and he had the model all picked out, right down to the specific color of the leather seats. The reason he called me was that he didn’t know how to answer the car salesman when the salesman asked Sam if he wanted to buy the car or lease it.
Financial vs Non-Financial Reasons
I mentioned some of the non-financial pros and cons of either option. Oftentimes, the non-financial issues really determine the decision, since for many vehicles, the dollar difference between buying and leasing may not always be that great. There are many lease vs. buy calculators on various websites, which will give you a financial answer once you have all the relevant numbers to plug into the calculator. Once you see the difference in dollars, the other factors come into play.
Some reasons to lease instead of buy:
- if you want a new car every two or three years
- want lower monthly payments
- don’t drive excessive amounts of mileage each year
- want the continuous warranty on the car
- don’t care if you don’t have equity in the car
On the other hand, some reasons to buy instead of lease:
- if you want ownership and equity in the vehicle
- don’t mind the higher monthly payments
- tend to keep the car beyond the loan pay-off date
- prefer being debt-free for the period of time after loan pay-off but before you get your next vehicle
- drive more miles annually than what the lease would allow you
- don’t mind having to pay for any maintenance or repairs once the warranty period ends
After I passed this information to Sam, he said that he would get me the numbers so that we could do that part of the calculation for him. The difference between leasing and buying with the numbers he had given me turned out to be only a couple hundred dollars, so in his case, it came down to the non-financial reasons. He had always driven newer vehicles and he wanted to keep his monthly payments as low as possible, so he went with his natural inclination and leased the car. His comfort level won out, and I had a feeling that Sam would want to do the driving whenever we would be going out to lunch in the future.
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