There are many reasons for material handling distributors to lease, but the primary one is preservation of capital. Businesses require money to operate, and tying up capital in vehicles can restrict opportunities elsewhere.
Vehicles are a necessary cost of doing business, but as depreciating assets, they are not helping the bottom line. Using capital to pursue money-making opportunities such as expanding inventories, upgrading training and systems will probably return a better yield than tying up funds in cars and trucks. Every business has the ability to borrow only so much money. Leasing allows a company to access its full credit line.
More Reasons to Lease
An accelerated depreciation opportunity on purchases of qualifying equipment (including certain types of vehicles) was recently rolled out under the President’s economic stimulus package. “Accelerated” is the key word here; it ramps up the depreciation allowance in year one, and then offers diminished percentages in subsequent years. The important thing to remember is that the total amount of depreciation does not change over the useful life of the asset, just the timing. To most companies, the amount allowed is not very significant, and in many cases, may not serve as any benefit at all. This change is really designed more for “Mom and Pop” businesses.
Acquisition costs of vehicles are usually significantly lower for a fleet leasing company than they are for material handling companies. Fleet leasing companies buy vehicles on a daily basis and keep abreast of fleet incentives, rebates, “CAP” programs, Fleet Identification Numbers and upfit allowance programs, ensuring that their lessees are getting the best buys possible.
Many times, fleet lessors are plugged into the vehicle manufacturers, ensuring that many post-warranty repairs get covered by the factory. Build time-to-delivery is often hastened by a lessor’s phone call to a manufacturer’s fleet representative. The lessor’s knowledge ensures a vehicle is equipped properly to best perform its function. Knowledge of GVWRs, axle and weight ratios, and cab-to-axle lengths allows fleet lessors to order the right vehicle for the job. Most fleet leasing companies can handle decals, shelving, bulkheads and other special equipment items.
Insurance issues are simplified under a leasing relationship, especially when compared to employee-owned and operated vehicles. Companies have been repeatedly found liable when an employee-owned vehicle is involved in an accident. Proper liability coverage is often lacking in these situations. Leasing companies keep a knowledgeable and watchful eye on critical areas of exposure, including driver qualifications, vehicle usage, safety training, domicile issues and assistance with claims processing.
An extremely valuable resource provided by fleet lessors is shifting the burden of vehicle disposal away from the end-user, and to the leasing company. Your personnel are not taken away from important tasks to deal with vehicle issues. Their time is better spent developing your business; and higher proceeds are nearly guaranteed when vehicle disposal is handled by experts in the business. Fleet lessors know the market, understand “timing” your vehicle recycling, utilize numerous disposition outlets, and have special expertise when it comes to reconditioning decisions, all of which result in higher resale values – for you.
So, what kinds of leases are there, and which is the best for your company? Most companies have three or four levels of vehicles: lower-level, mid-level and executive-level cars; and the truck fleet, which usually contains several different kinds of trucks. In the material handling business, sales and service tend to be the largest components of the fleet. In situations where the mileage is known to be low, closed-end leases (often referred to as “consumer” leases), such as those you see auto dealers running in your local newspaper, can offer a low-cost alternative.
As a word of caution, be especial-ly mindful of the numerous fees required under the terms of these leases—lease origination fees, termination fees, etc.—which often can drive up the monthly payment $30 or more per month. Also, the end-of-term inspectors have been applying rigorous standards to lease turn-ins, in major part to stem the flow of losses realized by the captive (manufacturers’ finance arms, i.e. GMAC, FMCC, etc.) and bank lessors due to too-high residual values.
These closed-end leases are just that—you walk away from the car at the end of the lease, assuming the mileage is within the parameters set, and the condition of the vehicle is “normal.” However, if your vehicles are driven lots of miles, the mileage penalties under a closed-end lease are prohibitive.
Most fleet leasing companies offer open-end, or TRAC, leases. These are ideally suited for most companies due to the flexibility allowed with higher mileage vehicles. After determining the use of the unit and the anticipated mileage (this is how you handle high-mileage leases), the lessor discloses to the lessee the capitalized cost of the unit, the number and amount of payments, and the residual (end-of-term) value.
Some lessees use a mileage number to determine the replacement timing, and some use the age of the unit. Whatever method is used, at the end of the lease term, the lessor disposes of the unit in a commercially reasonable manner, and charges back any deficiency, or shares any gain on the sale of the unit. Another way of looking at it is this: Selling Price less Residual Value less Expenses equals a Gain, Loss or Breakeven. The issue of setting residual values low or high is another discussion, but most fleet lessors tend to set conservative residuals if allowed. The concept is to serve the end-user’s needs in the most economical and efficient means possible.
The open-end lease allows mileage averages to be used to determine residual values. If twenty service vans are in the fleet, and the mileage average of the fleet is 25,000 miles/year, all twenty vans can be “residualized” at the same amount because at the end of the lease term, the losses on the higher-than-anticipated mileage vans are offset by the gains on the lower mileage units. Realistically, most fleets this size would be replacing only four or five vans per year, so the residuals would be examined on an annual basis.
A properly structured open-end lease allows the lessee to expense 100 percent of the lease payments and all other associated expenses (maintenance, insurance, repairs, fuel, etc.). Basically, this allows the lessee to break away from the confinements of Internal Revenue Service dictated rules on depreciation. If a car is driven 60,000 miles per year, the IRS depreciation rules state that it be depreciated the same as a car driven 12,000 miles per year. It will take a minimum of seven years to fully depreciate the unit if purchased. Leasing solves this issue for the smart lessee.
Where to Lease
OK, so from whom do you lease? As an independent lessor, I am obviously biased, but I should point out why. With one phone call, all the information needed can be obtained on a variety of makes and models. This keeps personnel out of emotionally draining, high-pressure auto showrooms, and allows decisions to be made at a more leisurely and intelligent pace.
Like any business, fleet lessors are in the relationship business, and they are here to provide your company with service. Like your business, service is the key to satisfied clients. So shop around until you find the lessor who provides you with the service level required, so you and your employees can concentrate on your business.
You’ll likely be very pleased with the numerous benefits and efficiencies provided by a quality fleet lessor, an expert “partner” dedicated to serving your needs and controlling your overall material handling service vehicle expenses.
|Meet the Author
Jim Rose Jr., CVLE, is president of Leasing Services II, Inc. in Shelby, North Carolina. A nationally Certified Vehicle Leasing Executive, Rose also serves on the Board of the National Vehicle Leasing Association and chaired its educational program.