Depending on the situation, an organization may be better off investing capital in other areas of its business that generate a higher return instead of investing in a depreciating asset like a truck.
Photo credit: Photo courtesy of Navistar
When performing a comparison between owning and leasing, the cost of equipment, including purchase price, taxes and additional equipment such as van bodies, auxiliary power units and refrigeration units, need to be taken into consideration.
Photo credit: Courtesy of Freightliner Trucks
Which one, buying or leasing, is the best use of capital? There is no one answer as every company is different. Factors such as how a company is capitalized and how it measures its success in regards to equity and debt will determine its best use of capital.
Fleet Maintenance picked the brains of some experts in the field of vehicle purchasing to gauge their thoughts on the subject.
“The best use of capital will depend on a company’s strategy and what it is trying to achieve,” says John Deris, senior vice president of national sales, fleet management solutions, Ryder System, an American-based provider of transportation and supply chain management products (www.ryder.com.) “If the company needs to have cash flow, then a lease solution might work best because it will allow them to invest capital elsewhere.”
If the company has the cash, then it may choose to go with a finance lease or a contract maintenance solution where a company like Ryder would provide the maintenance for the company’s fleet, he says.
“For years, many fleets thought buying and owning their own trucks made the most financial sense,” says Olen Hunter, director of sales, PacLease (PACCAR Leasing Company), a commercial truck leasing and rental company (www.paclease.com). “In many situations, a firm is better off investing capital in other areas of their business that generate a higher return instead of investing in a depreciating asset like a truck. Plus, numerous changes, including the increasing complexity of medium duty trucks and tractors; stricter government regulations; and the need for financial flexibility have brought full-service truck leasing to the forefront.”
“Leasing provides the most financial flexibility by allowing companies to preserve existing lines of credit while minimizing the upfront costs,” says Bill Blais, strategic consultant, GE Capital Fleet Services, a provider of commercial car and truck financing and fleet management services (www.gefleet.com). “It also typically allows for 100 percent financing of the asset, which can be an important aspect for growing companies.”
“Leasing allows companies to effectively use their capital or credit lines in ways more directed towards their core business,” says Dean Vicha, president, NationaLease, a full-service North American truck leasing organization (www.nationalease.com). “On the back end of the term it eliminates the risk of a risky used truck market and the potential depreciation losses that can occur when it becomes necessary to dispose of the asset.”
“We tell companies if trucking is not a core competency outsource it to a company like PacLease and focus on your business,” Hunter adds. “Leasing companies can help a company document the full cost of operating a truck and then put together a cash flow analysis that compares leasing and owning a truck. In most cases, we find that leasing is advantageous because the leasing company benefits from economies of scale when it comes to equipment and parts acquisition.”
When making the decision to either buy or lease, it is necessary to possess the right information. An ROI (return on the investment) calculation is recommended to determine whether a company should use equity or debt to finance its equipment. It is important to consider the marginal cost of capital, the lease interest rate, any variance in acquisition cost between scenarios, the state the vehicle will be registered in and the estimated cycling parameters. The decision should be supported by a net present value comparison between leasing and owning the vehicles.
Most companies that have a fleet because is necessary in their business but it is not their core business, really need the kind of professional analysis to drill down to their actual cost of ownership,” NationaLease’s Vicha says. The analysis covers everything, including acquisition cost, borrowing power, depreciation schedule, disposal capabilities on the financial side and identifying the true cost of administrating - licensing, permitting, fuel tax reporting, etc.).
“Often times, a major cost savings comes from a reduction in maintenance expense because leasing companies have predictive and preventive maintenance down to a science,” adds Hunter of PacLease.
Plenty of Options
There are many considerations to both owning and leasing trucks. With leasing, there are a variety of lease arrangements, kinds of leases and options. This leaves lots of gray area but gives a company the ability to pinpoint its needs and customize its approach.
“Some companies may choose to own their own vehicles for various strategic and tax reasons,” says Ryder’s Deris. “This, however, does not mean they also have to perform their own maintenance and keep the maintenance structure. Companies who own their own fleets can still choose outsourced maintenance services while maintaining ownership of the asset.”
“One of the primary benefits of owning trucks is the flexibility around vehicle disposition timing,” GE Capital’s Blais says. “There may also be regulatory or hazmat concerns that could make leasing difficult.”
There is a perception that truck ownership provides better control for the company, notes PacLease’s Hunter, but this may or may not be the case.
“In many situations, there is inherent risk associated with owning trucks,” he says. “Some of these risks include the value of the equipment at trade-in time, unpredictable maintenance costs over the equipment life, obsolete or stranded assets due to improper replacement cycle and increased costs caused by hiring, training and tooling technicians to keep up with ever-changing truck technology.”
Leasing can also provide a variety of additional services. For example, some leasing companies offer substitute vehicle programs that deliver replacement units while the leased trucks are being serviced. A vehicle lease can be combined with a maintenance package.
“One key difference is that in addition to providing a financing source, a fleet management company also offers value-added services such as a managed maintenance program, truck engineering support, fuel, accident, registration, compliance management and consulting services focused on helping companies reduce total life cycle costs,” says GE Capital’s Blais.
“Leasing can give a company the ability to minimize the risk of fluctuating costs in maintaining a fleet,” Vicha of NationaLease concurs. “Full-service leasing allows companies to manage their business to set fixed costs each month from their fleet of vehicles that remains consistent over the life of the truck.”
“Companies are currently experiencing a tight credit environment and may prefer to invest their cash in other areas of their business as opposed to tying it up in transportation assets,” says Ryder’s Deris. “With post-EPA 2010 engine technologies, the initial investment of buying a commercial vehicle has increased.”
“The benefits of leasing trucks are financial and operational,” Hunter adds. “Financially, a company can preserve capital for other parts of its business that generate a higher return. Operationally, leasing allows a company to focus on core functions of its business. Leasing can provide considerable flexibility to meet short-term and long-term equipment needs by custom tailoring a lease and maintenance package that matches the truck’s useful life.”