After you establish a stable replacement cycling model and identify vehicles for replacement, how do you determine your best option for financing the new vehicles?
Typically, lease terms are more attractive; lease payments are lower than conventional loans, and leasing requires less capital. On the other hand, once you purchase vehicles, your organization owns them outright and the equity remains with you, but this can restrict your cash flow.
Depending on your access to credit or financing, and on the financial goals of your corporate strategic plan, the lease or purchase method you choose can impact the number of vehicles you can afford to replace within a given timeframe. Limitations like this can roll into increased vehicle downtime and maintenance and rental costs, plus reduced productivity of your drivers.
Therefore, prior to acquiring vehicles, you should establish a stable capital funding model based on your organization’s unique circumstances.
Important Considerations to Analyze:
- Cash flow – Do you want to conserve your working capital? Do you have enough to cover the cost of the vehicles you need?
- Budget restraints – If you have budgetary constraints, lower monthly payments may be more important than long-term cost savings.
- Rules, regulations or other restraints – For example, regulated companies such as utilities generally purchase vehicles.
- Understanding vehicle use – Are the vehicles being used for what they were intended? What are the operating conditions: high/low miles, city vs. rural driving, lots of stops and starts or far spread destinations?
- Maintenance, downtime and risk – Will you terminate vehicles early to avoid identified trends for costly breakdowns and failures that are increasing downtime?
When deciding to lease or buy vehicles, be careful to best fit your company’s situation and needs, and don’t be fooled by myths.
Purchasing a vehicle is cheaper than leasing one.
As a general rule of thumb, the break-even point on a vehicle is approximately four years. Fleet managers can expect to pay 30 – 60 percent less for the same vehicle at the same price if the vehicle is leased short-term.
Hefty fees are charged when the vehicle is turned in.
Nominal transactional fees are charged on open-end leases. Closed-end leases typical allow 10,000 to 12,000 miles (16,000 – 20,000 kms) annually and charge 15 to 20 cents per additional mile (kms). On a closed-end lease, however, the lessee can negotiate higher limits on mileage in exchange for slightly higher monthly payments, and this may allow for some savings at the end of the lease.
Comparatively, when a purchased vehicle is sold, there are no “penalties,” but higher mileage vehicles are sold at lower prices.
Early release from a lease is difficult and heavily penalized.
In a closed-end lease, the lessee needs to make all payments before terminating the lease. Most leasing companies permit early release from open-end leases without penalties after a minimum time period. The lessee is still liable for the book value of the vehicle.
Don’t get fooled by leasing myths. Understanding the facts about lease costs and risks, coupled with a thorough analysis of your organization’s goals, financial position as well as potential financing means and strategies are critical to establishing predictable capital funding forecasts. When you pair your organization’s finance strategy with a sound replacement cycle, you can produce more certainty in your budgeting. The result is a fleet that delivers more value and helps the company generate revenue.