Businesses that operate in the trucking industry rely on good people and good equipment. Fleet managers who have both can overcome almost any obstacle. But the fleets that get ahead are the ones that make the best decisions about when and how to invest. One of the most important decisions fleet management makes is whether to lease or buy assets.
Should your fleet lease or buy fleet vehicles? The answer depends on many factors. For most fleets, the difference between leasing or buying won’t make or break your business. But when margins are tight and competition is fierce, little differences between larger profits or higher overhead will impact your bottom line.
Before you can make a call for your fleet on leasing or buying assets, you need to understand what your options are and the pros and cons of each. Once you understand the options, you need to figure out which one is best for your fleet. That means knowing the right questions to ask.
Read on to learn more about leasing vs. buying.
Leasing vs. Buying
Purchasing new assets comes down to a simple question of whether you can purchase a unit outright or need to finance the purchase. Leasing, on the other hand, presents you with numerous options that you need to understand before you make a decision.
When considering leasing options, fleet managers need to consider two primary factors: the term and the level of service.
Open-Ended Leases: An open-ended lease commences with a pre-determined minimum term, which is typically one year. At the end of the year, the lessee is permitted to extend the lease on a month-to-month basis if they choose to do so. When the fleet no longer wishes to lease the vehicles, the equipment will be sold. If the sale generates a profit, the lessor may be required to pay the fleet the difference. If, on the other hand, the sale is for less than the predetermined price, the fleet will be required to pay the difference to the lessor.
Closed End Leases: These lease agreements resemble the type of arrangement you are familiar with if you have ever leased a personal vehicle through a dealership. This lease will be for a fixed term and it will require the lessee to pay fixed monthly payments. There will be detailed conditions regulating the amount of wear and tear that is covered by the lease and there will be a pre-set mileage limit. If your fleet exceeds the allowable wear and tear or the number of miles covered by the agreement, you will be required to pay penalties at the end of the lease period.
Full-Service Lease: A full-service lease is meant to bundle all of your equipment costs into fixed monthly payments for each asset. It will typically include repairs, 24/7 roadside service, and loaner trucks when covered fleet vehicles are down for service. Repairs that are needed as a result of accidents or abuse fall outside the obligations of the lessor in most cases. The lessee will have to pay extra for excess mileage and any maintenance costs that aren’t covered.
Financed Lease: A financed lease will give you more control over your assets but that comes with a corresponding increase in operating costs that fall outside of your lease payments. This is a good option for a fleet that has in-house maintenance and repair and a process for gathering, reporting, and using data. In most cases, financed leases are done through a financial institution.
When you’re evaluating your options for purchasing vehicles, you need to consider whether to purchase new or used and whether to buy outright or finance.
Pre-Owned: Purchasing a used commercial vehicle doesn’t necessarily mean settling for less than the best. With brick-and-mortar dealerships, equipment auctions, and online marketplaces—there are plenty of resources available to someone willing to put in the time it takes to find a good deal. Purchasing used fleet vehicles can be a great way to get a bargain but be sure to do your research and spend the time it takes to make sure you’re getting what you paid for.
Purchase New: When it fits your budget and business plan, purchasing new vehicles is the option that will give you the most control over what you purchase and how it is used and cared for. Purchasing new allows you to select the features package and gives you some input on the fundamental features of your equipment. Beyond that, it gives you complete control over the maintenance and repair of the vehicle and thorough records from purchase to retirement.
Finance: Some fleets finance vehicles out of necessity while others choose to do so. The biggest factor to consider when you’re looking to finance a purchase is the interest rate that you qualify for. If you can borrow at a low rate then you can preserve capital for other business operations. If you have a higher rate, you can plan to pay more than your monthly payment to get ahead of the added expense of high interest.
Purchase Outright: If your business has the opportunity to purchase new vehicles outright, it’s an attractive option. However, you should weigh that option against other business needs and opportunities. Is new equipment the best way to invest that capital to help your business grow? Are you letting the capital you have available limit your options while shopping for new vehicles? Just because you can doesn’t always mean that you should.
Benefits of Leasing vs. Benefits of Buying
There is no one-size-fits-all approach to acquiring, retiring, and replacing assets. The best approach for your fleet is the one that will maximize the benefits to your business and minimize the costs. To know which combination of options does that, you’ll need to evaluate where your business stands, what your fleet does, and where you want it to be in the future. Both leasing and buying have certain benefits to a fleet—which one suits your business best?
Benefits of Leasing
Finding a fleet leasing option that fits your business plan will deliver several benefits to your fleet’s bottom line. A lease will allow you to get the vehicles you need to replace retired assets or expand the fleet’s capacity. At the same time, monthly payments will allow you to preserve the capital that the business needs to address other initiatives.
A lease will likely save your business money on maintenance and fuel. Newer vehicles are more efficient and less prone to breakdowns. Your business will show a better balance sheet because leases won’t change the debt-to-equity ratio. On top of these benefits, you’ll also reduce the administrative workload that your assets require from in-house staff. And of course, your drivers will be out on the roads in newer, more attractive trucks.
Benefits of Buying
When you decide that purchasing new vehicles is the best fit for your business, the fleet will get certain advantages. Since you’ll own the vehicles—you won’t have any limitations on what you do with them, how many miles you put on them, or who gets to work on them when they need maintenance or repairs. Fleet management can retire or replace assets based on the market for used equipment and nothing more.
Purchasing vehicles gives you the ability to negotiate on pricing so that you can get a better deal for your business. There are tax benefits to purchasing vehicles and your accountants will have control over the depreciation. At the same time, since you will show the assets on your balance sheet, you’ll earn equity for your business.
Should Your Fleet Lease or Buy fleet vehicles?
Consider the following questions to help you decide whether Leasing or Buying is right for you:
- Does your business have enough available capital to allow a purchase without a loan?
- Is new equipment the best use of available capital right now?
- Do your businesses’ finances allow you to secure a loan with an attractive interest rate?
- How long will you use and maintain the vehicle before retiring it?
- Does your fleet have an in-house maintenance department?
- Do you have the resources to gather, store, and use data about the asset’s performance?
- Is your business subject to seasonal fluctuations?
- Does your business require the installation of specialty equipment on your units?
- Do you want to maintain control over the timeline for retirement and replacement?
These are just some of the questions that you’ll need to consider while evaluating your options for acquiring vehicles. Making the right decision for your fleet can make a big difference to your business’ bottom line.
FleetPal Connect Gives Fleet Managers the Tools They Need for Maintenance and Repair
Whether you purchase or lease the equipment that your fleet uses to get the job done, you can count on FleetPal Connect to keep your maintenance and repair operations running smoothly. With features that help to plan, schedule, and execute maintenance tasks and communicate information to everyone on the team—FleetPal is the right tool for the job.
If you would like to learn more about how FleetPal can help you and your team get better results, give us a call or visit our website. We’ll be happy to give your fleet management team a tour of the software platform and answer all of your questions.