Should You Lease Or Buy Your Tow Truck?
If you run a towing business, you’ve probably considered leasing rather than purchasing. The vehicles you need to run the business, such as Wreckers and Tow Trucks, are massive investments. Deciding whether you’re going to purchase or lease is possibly the most important decision you’ll make about the business. Naturally, both choices have their benefits and drawbacks. Yet these days, there are creative lease packages that are carefully designed to fit customer needs.
So why is leasing a better option than buying? The biggest reason is freedom of choice. For example, leasing gives you more options on what to do with your truck. Most lease contracts have a clause that allows you to buy your truck from the lease company for a “residual” amount. This can range anywhere from a mere $1.00 to 50% of the original purchase price. If you think you can buy a better truck for cheaper, then you can let the lease company have the truck. Since leasing contracts can last for 3 years or more, it may well be true that you can find better for cheaper at the end of your contract. Leasing means you won’t be stuck with a sub-par truck if you don’t want it.
The second reason would be the profit. For a service company such as a towing company, having a higher profit margin every month may be the difference between success and failure. Comparing your monthly lease payment to the amount of depreciation, especially when you add in the interest on a traditional loan, you’ll often find that there’s a lower overall cost. This could easily lead to more money in your business coffers.
Money in general, and not just profit, might be a good reason to lease. When you lease a new or used tow truck, you might find that you can protect your cash flow. Many traditional loans will require a 20% down payment. However, many leases require nothing more than the first and last month’s payment. This can be a good deal less than the 20% down payment, which means you’ll have more money to start your business.
The way lease payments are set up might make your balance sheet look better, as well. It is true that lease payments are a monthly expense. However, they don’t tend to be listed as a long term debt. Since it’s not listed as a long term debt, this can make your company have a higher net worth when looking at the books. That can have a huge effect on any future loans you end up taking out. Not only that, it can have an effect on how much your bank is willing to extend when you set up your business line of credit. It may seem questionable, but there’s nothing illegal about it. Lease payments simply aren’t considered the same was as loans.
Ultimately, the choice is up to you whether to buy or lease. Buying is the traditional choice, but not being able to pay your loan payments results in the same problem as not being able to pay your lease payments. Namely, the bank possesses your business. Since the end result of failure is the same either way, you may as well choose the option that gives you a better footing when you start.