What exactly is the residual value of a fully electric Tesla (NASDAQ:TSLA) Model S? Banks have had a difficult time answering this question because Tesla is the first purely electric U.S. vehicle manufacturer to pursue financing programs. There's no precedent. How can banks know how well Tesla's vehicles will hold their value?
This dilemma has prompted Tesla to come up with few customized financial products to address the problem. Tesla's latest financial product offers business owners a way to lease its vehicles under a new subsidiary called Tesla Finance. For investors, this is great news -- Tesla's new business is another way to help secure future demand for its vehicles.
Tesla's financing and leasing solutions
How can Tesla address the uncertainty of bankers regarding the resale value of a Model S? Simple: Guarantee the resale value. That's exactly what Tesla did last year. Not only did Tesla guarantee that the Model S will have the top residual value of any high-volume premium sedan brand (Audi, BMW, Mercedes, or Lexus) after three years of ownership, but Tesla CEO Elon Musk personally promised to stand behind the guarantee.
The financing move was compelling for customers. Not only did it provide the same flexibility in leasing by enabling owners to trade in their cars after three years, but owners are still able to take advantage of the $7,500 federal tax credit -- something Tesla customers couldn't do if they were to lease.
But with the launch of Tesla Finance, the company has finally made leasing a reality for businesses -- adding even more flexibility for customers. The leasing arrangement makes taking business deductions for Model S payments easier than ever.
To top it off, Tesla made the new program as pain-free as possible:
While customers have become accustomed to lease agreements that run as long as 10 pages, we found that we could say all that needed to be said in less than three pages – and it's written in plain language.
In keeping with the Tesla way of doing things, our customers can handle and sign their lease agreements completely electronically. Customers are able to view an electronic version of the lease agreement upfront before delivery. Even the signature process at delivery is simple: a one-button tap on the 17-inch touchscreen in their new Model S is all it takes.
Another reason to be confident in Tesla's demand story
Tesla's ability to remain supply limited with excess demand is key to the underlying investment thesis for the company, especially with the stock trading at such lofty valuations. Currently, investors can rest easy -- there's no evidence demand limitations are on the horizon. Not only is the company spending zero dollars on advertising, but it also doesn't have any plans to initiate paid advertising. Further, near-term catalysts should help boost demand. Its Model X SUV is due next year and the company is rapidly expanding into new, key markets. And now a new leasing business gives Tesla's demand story even more credence.
Obviously, Tesla's demand trajectory may not always look so robust, which is why investors should keep an eye on factors that may affect demand for its vehicles.
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Daniel Sparks owns shares of Tesla Motors. The Motley Fool recommends and owns shares of Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.