The choice between owning and leasing can be a tough decision.
There are a number of tough decisions that fleet managers will be faced with during their careers. But, perhaps the biggest is helping to determine whether their companies’ fleets would be better served being leased than owned.
Most likely this isn’t a decision left solely to a fleet manager, but to the extent it is, he or she can help senior management reach an informed decision. And, if the answer is leasing, it will undoubtedly be up to the fleet manager who will lead the negotiations to getting the company the right deal for the fleet.
Leasing can involve more complex negotiations to get the most for the fleet dollar. For those new to leasing, pursuing this method of fleet acquisition can be overwhelming, particularly while negotiating lease terms. But, it doesn’t have to be.
To Lease or Not
There are a number of considerations to evaluate when making the decision to move from an ownership to a leasing model for a company’s fleet.
“Every decision in fleet, from what type of vehicles to select, to the services and the type of lease structure, should be evaluated based on your company’s overall goals and culture,” said Laura Jozwiak, vice president of client relations for Wheels. “If your company currently owns, and you would like more flexibility on when to replace and how many to replace, leasing provides that flexibility.”
In these times of tight budgets, leasing could provide another big advantage, according to Jozwiak. “Instead of seeking approval for a capital budget expense, which is typically required under an ownership model — and may or not be approved for the full level you requested — you could move to leasing which offers mitigation of up-front sales tax in most states, flexibility on when to replace vehicles, freeing up capital, and many other valuable advantages.”
Time is another consideration to make when evaluating the pros and cons of leasing. “If you cycle your vehicles four years or less, you’d probably want to lease the vehicles,” according to Tom Coffey, VP sales and marketing for Merchants Fleet Management. “There are also the identifiable accounting and tax benefits that you should consider.”
Echoing Coffey, Bryan Steele, senior vice president, client relations for LeasePlan USA, said that there are five primary reasons to consider leasing over owning:
- Pay only for the usage of the vehicle.
- Avoid diverting capital away from business objectives.
- Possible off-balance sheet reporting.
- Predictable budget; one lower monthly payment.
- Tax benefits.
For Paul Azores, controller for ARI, how leasing feeds the bottom line is paramount. “With leasing you’re trying to maximize cash flow. There are no up-front fees and you can use the excess cash you save to reinvest in the core business,” he said.
On the Day-to-Day Business Side
Jim Kachidurian, SVP client services for Donlen, noted that leasing makes sense because it requires less administration on acquisition, titling, and remarketing. “Tying up capital to acquire vehicles may not be a good business decision,” he said. “It’s better to concentrate on your core business.”
For Tim Mundahl, senior strategic consult, GE Capital Fleet Services, leasing is a win-win for fleets.
“Leasing often provides all of the benefits of owning fleet vehicles plus the cashflow benefit of paying rental tax over time versus up-front sales tax in rental tax states — approximately two-thirds of the states are rental tax states. Leasing often has a positive net present value (NPV) versus up-front purchases when discounting at a company’s true opportunity cost of capital,” he explained. “Leasing also takes the acquisition of fleet vehicles out of the arduous fight for capital allocation budgeting process, is easier to administer, normalizes cash-flow while purchasing, creates ebbs and flows, and through a fleet management company leasing provides complete reporting, ease of ordering, discounts on acquisition costs and many more benefits.”
While Mundahl is an advocate for leasing, he does concede that there are times when owning makes better sense.
“For example, infrequently used vehicles and specialty-use vehicles with a limited resale market might be better candidates for purchase,” he said. “Finally, companies in danger of violating restrictive covenants on their debt instruments need to evaluate the impact of leasing as part of their consideration.”