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Own or lease

Comparison between Operational Lease and other financing methods.

Discover why Operational Lease is different from other financing methods.

Operational Lease is a vital tool for your business. It improves the business cash flow, reduces the depreciable capital and spreads the expense over the entire leasing period. What about the other market alternatives?


Outright Purchase or Finance Lease: what are the impacts?


  • The business buys the vehicle with their own cash or via some other form of finance. e.g.: loan

Purchasing a vehicle by using equity, generally means that the company has significant cash reserves. We consider, that using equity in this manner undermines what equity should be used for in a business . In using it in this way has a negative impact on the return on equity required by the shareholders. If the business buys the vehicle with borrowed funds, it will incur financial expenses and ultimately diminish the borrowing capacity of the business for more important investments like plant and stock.  In this method of funding all risks on the vehicle remain with the company.

  • The business leases the vehicle via a finance lease

In finance lease the risks relating to the asset are virtually transferred to the lessee ( the user) as if they had bought the vehicle outright - as above. During the term of the finance lease the user will generally have paid for the full value of the vehicle and will bear the risk ,should the sales value of the vehicle not match the final balloon payment agreed at the commencement of the lease.  Furthermore, because the user carries the residual value risk the vehicle must be shown on the users Balance Sheet.

  • The business uses the vehicle under an operational lease

An operational lease is not financing, but a lease. The business buys a service, and therefore will never own the vehicle. As there is no ownership , the vehicle and the lease is an off balance sheet item.

The business makes monthly payments that cover not only the use of the vehicle but also all the services required to use the vehicle: maintenance, assistance, tyre replacement, etc. These payments depend on the model of vehicle chosen, the length of the contract and anticipated kilometers and the associated services chosen.

Benefits of operating leases vs outright purchase


Feature Outright Purchase Operational Lease Benefits
    Buy Outright or via a Loan Employer Employee
1 Cash outflow Buy: Entire amount is paid out upfront Minimum cashflows due very high rear end residual value Same
Loan: Higher outflow due to 100% repayment of loan
2 Company Car Option Expensive investment in one shot Small Monthly Operating Lease Rental spreads out over the lease period. Only part of purchase value is counted into monthly rental More employees can be covered due to higher affordability of small monthly rentals
Only offered to limited number of employees A replacement of cash transportation allowance brings potential savings in individual Income Tax
3 Depreciation vs Revenue expense Lower: At least 4-year amortization period Higher: Monthly Rental completely expensed off to Profit and Loss Account NA.
4 Non core Asset Assets On Balance Sheet Assets Off Balance Sheet NA.
5 Sale and Lease Back NA. Existing corporate owned cars can be taken off balance sheet through an arms length Sale and Lease Back transaction Employee own vehicle can be acquired and converted into Operating Lease in same manner.
6 Disposal of car Risk of Resale Value remains with the Corporate No Risk on Resale Value as this is borne by Arval Jiutong Employee has option to buy vehicle at contract end
Hassles of car disposal Phone Arval Jiutong and we collect the car at contract end
7 Service repair maintenance Non core activity of Corporate All inclusive costs managed by Arval Jiutong. Same
Administrative hassle of monitoring + processing invoices. Reduced administrative hassle. Full Outsourcing Benefits Tax free benefit
  Cashless transaction  
Costs vary across the country Benefit from expert advice Just calls Arval Jiutong to book all Service and Maintenance requirements
  Fixed costs per month  
Budgetary uncertainty    
  Easier cost allocation within Coporate  
8 Insurance & Accident Management Non core activity of Corporate. Reduced administrative hassle. Outsourcing Benefits. Same
Administrative hassle Cashless transaction. Tax free benefit
Expertise required for handling Insurance/Claims and Bodyshops Benefit from Arval expertise  
  Quality of workmanship impacts sale proceeds  
9 Relief Vehicle Additional cost Included as a value added service Same
Uncertainty of mobility Mobility assured Tax free benefit
10 Roadside  Assistance Corporate potentially  involved as vehicle owner Included as an value added service 24x7 Tax free benefit
11 Financial Balance Sheet Ratios Cars being Non performing assets, Lower ROCE &  RONA for the Corproate + Shareholders Being off Balance Sheet, RONA will increase sharply. Lower cash-out flow shall also improve ROCE. NA.

Operational leasing vs other funding methods


Outright Purchase

Credit Financial
Full Service Leasing
Property client client Leasing Company Leasing Company
Cash immobilisation 100% 30 - 80% 0 - 20% 0%
Vehicle's depreciation risk Client Client Client Leasing Company
Interlocutors Many Many Many Only one
Services provided to driver No No No Full