The Lease Of Your Worries
DEMYSTIFYING TRUCK LEASING
Maintaining a fleet is becoming more expensive as government regulations on carbon emissions are tightened. The Environment Protection Agency (EPA) and National Highway Traffic Safety Administration (NHTSA) are trying to reduce gas emissions by imposing stringent requirements. This means a bigger spend on up-to-date vehicles that meet demands to reduce carbon dioxide, nitrous oxide, methane and various hydrofluorocarbons emitted during combustion.
Leasing your fleet can make sense. The terms of leasing are more flexible than renting or purchasing and the fleet manager knows that he has up-to-date trucks on the road, that they are fully covered by insurances, and that when the contract period is over a new agreement can be negotiated. If your fleet needs suddenly increase or decrease, there is no need for costly and time-consuming sales; the lease agreement can simply be adjusted to suit your changing requirements or a new lease can be signed. At the end of the lease term you have the option to hand the vehicle in and walk away, purchase the truck, or trade the truck in for another vehicle.
The financial benefit of leasing your fleet is that the monthly costs are fixed and can therefore be budgeted with a very minimal upfront payment. If you opt for full-service leases, most maintenance services and necessary repairs on your fleet will be covered by the leasing company with no extra cost to you (other than the relatively higher monthly cost). Some leasing companies even have flexible fleet leasing options for companies whose fleet sizes are variable and fluctuate with the season.
If your trucks are highly visible and have high customer recognition they are often used as rolling billboards. In these instances the fleet would need to be kept in excellent condition and leasing allows them to keep looking good without having to replace them frequently.
THE DRAWBACKS OF LEASING
Despite the benefits of leasing, there are also drawbacks, as with any business decision. Allan Beales, owner of Azura Distributors, says, “I prefer to buy my own trucks. The trucking industry is quite volatile: carriers who sub-contract to you can go into liquidation, owing large amounts of cash that can’t be recovered; clients also go into liquidation owing large amounts. It’s best to keep your expenses down, save for the extra vehicles during the good times and be reasonably debt-free.”
Leasing may not be the best option for companies that have low-mileage routes, in which case it may be more cost effective to buy or rent. Tax benefits also need to be taken into account as funding and tax incentives may only apply if the vehicle is owned. Lessors also may be hesitant to lease trucks that will be used for high-risk operations such as transporting dangerous chemicals, or instances when the fleet is used predominantly in off-highway or cross-border operations.
HOW TO LEASE
If you decide to lease your fleet, it is important to find the best fit for your needs and understand the terminology that you may encounter. An acquisition fee, also referred to as an administrative fee, bank fee or assignment fee, is charged at the beginning of a lease agreement and includes a number of administrative costs. This can sometimes be included in the gross capitalized cost—the total value of the truck as well as other items included in the lease agreement, which may be the acquisition fee, insurance, services and/or taxes. If you have made any down payments or used rebates to reduce the gross capitalized cost, these are referred to as capitalized cost reductions and are subtracted from the gross capitalized cost to obtain the net capitalized cost, also called the adjusted capitalized cost. Finally, a refundable security deposit may need to be paid at the beginning of a lease agreement to cover the lessor if you default on payments or to cover any costs remaining at the end of the lease term.
Other terms you may encounter during your lease negotiations are residual value, depreciation, money factor and disposition fee. The residual value is the calculated value of the truck as it is expected to be by the end of the lease term. This is used to calculate your monthly payments and depreciation. Depreciation refers to the loss of value in a truck through wear and tear by use over the term of the lease. The money factor, also known as the lease factor, is a decimal number that determines the portion of the monthly payment that is the rent charge. At the end of a lease term a disposition fee, or disposal fee, is charged if you decide to return the truck to the lessor. This covers the cost of preparing the truck for resale.
Full-service leases or maintenance leases are exactly what they imply. They include fleet management and maintenance plans in the lease agreement and calculated monthly payment. These leases cost more, as the monthly payment will likely include financing a worst-case scenario, but it takes the stress and complications out of leasing and maintaining your fleet.
Fleet flexibility is sometimes offered by leasing companies, which allows you to quickly and easily adjust your fleet size. It prevents you from paying for vehicles that are not being used; there is no need to worry about what to do with trucks you need to sell but may have need for in the future. And a sudden rise in shipment demands can be quickly and easily met.
What is the difference between closed-end leases and open-end leases? The main difference is who determines the residual amount, and thus the monthly payments. In an open-end lease you would decide on the residual amount, which can make monthly payments less, but then you take on the risk of paying for any deficit if the estimated residual value is higher than the truck can be sold for after the lease term is concluded. However, if the estimation was low (resulting in higher monthly payments but a higher residual value) you would receive the balance of the income made from the sale of the truck, over and above the estimated residual value. In closed-end leases, the lessor takes on the residual risk but these plans sometimes have mileage restrictions that, if exceeded, will lead to penalties. This can also have higher monthly costs and you will not receive any benefit if the actual residual value is greater than the calculated residual value.
“Off-book” or “on-book” financing are often offered; which option you choose depends on the debt-to-equity ratio status of your company. With on-book, the vehicle value reflects as an asset while the loan is a liability. Off-book leases do not show as a liability, which improves the debt-to-equity ratio. You should go for the off-book option if you anticipate applying for loans.
The options can be bewildering and overwhelming, but with enough research of options and service providers you are likely to find a leasing option that will best suit your business needs. Whichever route you take, make sure to do the math first!