Home » Distribution: Deciding whether to lease or buy
5 tips for making the most economical decisions for your fleet
Vehicle acquisition can be done by leasing or buying. Both methods offer advantages and disadvantages. The decision depends upon you and your operation, and what makes the most sense for your company’s transportation needs. The best way to determine whether to buy or lease is a thorough analysis based on several key questions, according to officials at Paccar’s PacLease commercial trucks leasing and rental company.
1. What is the best use of your company’s capital? When buying new equipment that depreciates, like trucks, most companies seek to gain a maximum amount of return on their investment. That’s why financial decision-makers will evaluate whether the investment in equipment offers a return higher than their “hurdle rate” â€” usually defined as a company’s weighted average cost of capital plus a nominal premium.
If it doesn’t, then leasing may be a good alternative.
It is also important to conduct a return on the investment calculation to determine whether equity or debt should be used to finance the equipment.
Most leasing companies can assist with such ROI analyses for leasing and purchasing.
2. Is transportation your core competency? Many companies have determined that by leasing their trucks and assigning their maintenance, roadside service, fuel tax reporting and other administrative headaches to leasing companies, they can focus their energies on activities central to their business, and also have time for activities that help the company gain new business, Paccar officials say.
Specifying the right equipment for trucks and handling maintenance requires the right knowledge, and transportation managers must keep up with the latest developments in trucking technology. Furthermore, maintenance facilities must be properly equipped and staffed with well-trained technicians.
By outsourcing non-core functions related to trucking through a full-service lease, companies can fill the driver seats with their own people, while taking advantage of their leasing provider’s equipment know-how, plus equipment buying power and expertise, say the experts.
3. Do you know what the true cost of ownership represents? Most companies have a good handle on their financing costs, and typically, equipment financing is a fixed, known quantity. However, the cost of maintenance is often not well known or understood.
Large fleets that have good accounting departments know down to the penny, on a unit-by-unit basis, how much they spend on labor, parts, tires and outside repairs for their trucks. They can also know how those expenses are trending compared to their annual budgets.
These fleets also can track trends that indicate poorly running units and units that experience repeat repairs. These types of trends influence future component purchasing and maintenance practices, and also help guide replacement cycle decisions.
By having a handle on these types of trends, organizations can fine-tune their trade cycles and optimize their operating costs, the officials say.
For small fleets, many lump all of their transportation expenses into general accounts so they have no real way of identifying costs on a per-unit basis.
Full-service lease providers can help fleets understand what their true maintenance costs are. Most have software they use for predicting and budgeting future maintenance costs.
4. What information or data is needed to make a lease/own comparison? Experts say there are 12 basic costs â€” seven for ownership and five for leasing â€” that need to be identified to perform an accurate comparison.
Initial cost of equipment (original purchase price, including taxes and additional equipment such as auxiliary refrigeration units, etc.)
Interest rate if considering a bank loan, the length of loan and the down payment
Length of asset life (how long will the equipment be used?)
Corporate tax rate (used to determine a company’s net, after-tax benefits of depreciation write-off)
Maintenance costs during the equipment’s life
Administrative costs for licensing and tracking Department of Transportation compliance, plus the general and administrative costs associated with managing a fleet’s maintenance
Net present value calculation of the monthly payments, finance cost and maintenance cost during the equipment’s lifetime
Variable cost (mileage rate) if a full-service lease
Length of the lease
Net present value calculation of the lease payments over the equipment’s lifetime
Residual responsibility (is it yours or does it belong to the lessor?)
It is vital to tally all associated administrative expenses under ownership and lease before a comparison is made, the officials stress. Once this data has been gathered, a net present value calculation â€” which estimates the future cash flows of ownership and leasing in today’s dollars â€” can be performed.
It is also essential to look at the net after-tax cash flows under ownership and leasing, as this will give a true picture of how depreciation impacts ownership and leasing cash flows.
Here again, most leasing companies have lease/buy tools that fleets can use to load their data to perform these calculations.
5. What are the perceived benefits of ownership and leasing? Truck ownership has been perceived to provide better control, but in some situations, there is inherent risk associated with owning trucks. These 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 provide 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. It can also help allow for a more stable cash flow as fleets make one monthly fixed payment for their trucks and their maintenance.
Clearly, the buy vs. lease decision is a complicated matter. But when given careful consideration, based upon your particular situation, a wise decision can be made. BI
David Kolman is a veteran truck communicator, keynote speaker and long-haul trucker. Commissioned as an Honorary Colonel on the Kentucky governor’s staff for his work promoting traffic safety, he actively participates in trade associations and reports news and information about the trucking industry for broadcasting and print media.
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