On Sept. 18, the Federal Reserve enacted its first interest rate cut since the early days of the COVID-19 pandemic, slicing half a percentage point off benchmark rates in an effort to head off a slowdown in the labor market.

Meanwhile, on Sept. 28, the Equipment Leasing and Finance Association (ELFA) released its Monthly Leasing and Finance Index (MLFI-25) for August showing new business volume of surveyed member companies representing the $1 trillion equipment finance industry was down 10% year-over-year and 17% month-to-month, and up 3.5% year-to-date.

“The Fed’s decision to begin lowering interest rates will support demand for equipment, even if some businesses wait for rates to fall further before investing,” said ELFA President and CEO Leigh Lytle, in a statement. “That wait-and-see approach showed up in our August MLFI as new business volumes declined. However, ELFA members expect acquisitions to pick up once we‘re past the election and interest rates fall a bit further.

“That sentiment was also reflected in our foundation’s recent Monthly Confidence Index, which showed that equipment finance executives are very optimistic about their organizations’ prospects over the next four months,” Lytle continued. “Finally, credit conditions remain healthy, which will allow lessors and financiers to service new demand when it shows up later this year.”

Kevin McWilliams, major accounts director at Yale Lift Truck Technologies, Greenville, N.C., explains that, although interest rates impact the cost of financing, rate cuts shouldn’t necessarily dictate whether beverage operations lease new equipment.

“The operational benefits of leasing can drive substantial savings through fleet rotations that keep equipment at maximum efficiency, but when rates are rising, businesses sometimes shy away from leasing in hopes of saving on interest expenses,” he explains. “Of course, lease payments decrease when interest rates are lower and increase when interest rates are higher, but that is often true for other equipment acquisition options as well.

“The primary alternative to leasing involves obtaining money through a bank, and the cost of that loan is tied to interest rates and inflation, too,” McWilliams continues. “Because loan agreements are for the entire cost of the equipment, they result in higher payments than a lease where lessees do not pay for the residual value of the equipment at the end of the term, which is often 20-40% of the equipment cost.”

McWilliams adds that although interest rates are a driver of costs, they are by no means the only factor impacting the value of leasing.

“To understand the complete cost comparison and value of leasing, businesses must also account for the operational benefits that are consistent regardless of the state of the economy and that help drive a low total cost of ownership,” he says.

Leases are also predictable and simple. They bundle equipment costs into a single, fixed monthly payment, and let businesses focus on operations instead of worrying about eventually disposing of or selling used equipment.

Overall benefits

Highlighting the top reasons that beverage operations turn to leasing equipment, Yale’s McWilliams notes that during the past few years, there have been dramatic changes in how products are purchased and delivered to customers across industries.

“A huge increase in internet buying accelerated the shift to warehouse products and changed the nature of the products people are buying and the trucks that warehouse facilities use to move them,” he explains. “For beverage operations in particular, there’s demand for greater product selection and availability. That means more SKUs with diverse packaging sizes and types and increased racking to store them, which creates more congestion and tighter spaces.

“This results in longer, more complex pick paths, but beverage operations also face pressure to move more product faster to meet shorter order response times,” McWilliams continues. “In the face of cost pressures and decreasing margins, beverage operations can look to fleet management programs to optimize fleet size and composition.”

Given this current operational environment, McWilliams considers leasing to be one of the simplest and cheapest forms of fleet management.

“It can reduce fleet cost compared to other forms of financing while also improving fleet and overall efficiency, by enabling operations to replace equipment as service and maintenance costs increase,” he says. “If you think about it, leasing is a planned replacement program with the goal to move trucks out of an operation when they’re no longer of service, and that also can help beverage operations get access to the latest forklift technology designed to maximize productivity in these conditions in a way that’s generally faster and more cost-effective than purchasing new equipment.”

McWilliams also notes how leasing can preserve and lower the cost of capital, manage taxes through deductible payments and enable unique payment options to meet an operation’s cash flow requirements.

“Leases are also predictable and simple,” he says. “They bundle equipment costs into a single, fixed monthly payment, and let businesses focus on operations instead of worrying about eventually disposing of or selling used equipment. Leasing is also an attractive option for third-party logistics providers (3PLs) because they can tailor lease terms to match their warehouse contracts.

“But maybe the most important advantage is that leasing is a passive — but very effective — form of fleet management,” he continues. “Companies that purchase equipment generally keep it 10 years or longer, and older equipment is generally costly due to increased maintenance spend and diminished reliability. Leasing enables operations to replace lift trucks as their maintenance costs increase, optimizing fleet costs and boosting operational efficiency.”

McWilliams also highlights how holding on to older equipment can limit access to new technology and features that can have a significant positive impact on operations.

“Advances like newer forklift motive power options such as lithium-ion batteries, new safety and ergonomic developments, and other design improvements can increase productivity and lower total cost of ownership,” he explains. “Leasing instead of owning means operations can more easily take advantage of these advances as they become available.”

Weighing the options

When it comes to deciding whether it is best to lease long-term or in the interim, McWilliams notes that short-term rentals are an important option that allows companies quick access to equipment when demands increase without any long-term obligations or commitments.

“But there are definitely some downsides,” he says. “There is often a more limited selection of equipment available for short-term rental, so companies might not have access to the exact equipment they need. Because all forklifts aren’t operated in the same manner, short-term rentals can present training challenges. There are also usage limits on some short-term rentals, and the cost is generally higher over time than a long-term lease.”

Addressing equipment maintenance, McWilliams suggests that one of the best ways to ensure that leased equipment is always up and running is to negotiate a separate repair and maintenance agreement as part of the lease.

“The cost of the maintenance plan can be added to the lease cost so the company can make one payment that covers both the lease and maintenance,” he explains. “A repair and maintenance agreement can also help keep your equipment in lease-return condition.

“Most leasing contracts detail the condition in which the equipment must be returned at the end of the lease — whether forklifts need to be returned with new tires, no scratches or dents, and so on,” McWilliams continues. “End of lease repair costs can potentially be very high, so it’s important to understand what those costs are, and to negotiate the end-of-lease terms and conditions up front to avoid expensive surprises.”