Is It Better To Lease Or Buy Vehicles?

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.”

Be Informed

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.).