Reprinted from Business Fleet Magazine, July/August 2001
Steve Elliott, Executive Editor.

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May 2001
Leasing: Still Cost Effective?
by Steve Elliott, Executive Editor
To lease or to buy? For many companies, leasing is still a viable option to purchasing, despite well-publicized drops in vehicle residual values due to a glut in the used-vehicle market, among other factors.

The latest small-fleet leasing programs often include flexible options which can be tailored to your company's needs, along with value-added services including the purchasing expertise and remarketing savvy which professional lessors bring to the table.

Make no mistake about it: excess wear and tear on leased vehicles, or mileage which exceeds predetermined limits, can definitely cost you extra. But many small fleet-oriented leasing companies are striving to structure customized programs that can reduce or even eliminate such penalties.

Lease vs. Buy

Although many companies prefer a sense of ownership, leasing can be especially attractive for the fleet manager or company owner who dreads the time-consuming hassles of selecting and purchasing a vehicle, paying large repair bills once the vehicle is past its prime, and selling or trading in out-of-service fleet units.

"Some people just want to own," said Stephen Scully of Scully NationaLease, Fontana, Calif. "They have pride of ownership, and they feel if they're leasing they are a second class citizen."

But according to Scully, with depreciation, owning a business vehicle can be a terrible investment. "The pride of ownership really has a tremendous cost to it," he told Business Fleet.

While falling residuals (especially for SUVs) are a legitimate cause for concern, and can result in higher monthly lease payments, lessors point out that must also be dealt with when you own your vehicles. Whether you buy or lease, fluctuations in the used-vehicle market are going to affect you.

"The vehicle doesn't know how it's being paid for," said Bill Crawford, president and owner of Wilmar Leasing, Inc., Charlotte, N.C. "The vehicle is going to be worth the same amount if it is owned, at any point in time, as if you leased it."

"They have to realize that if we lease them a pickup truck as an example, and set a $13,000 residual on that truck, then the truck only sells for $12,000, they have to make up the difference and pay that thousand dollars on the back," said Fred M. Palmer, president and CEO of Creative Leasing, Inc., Tuscaloosa, Ala. "But from the lease vs. purchase standpoint, they would only have gotten $12,000 for it anyway."

"I don't think there's a huge difference between the lease and the buy when it comes to resale," agreed Steve Keeler of Northwest Fleet Lease, Inc., Kent, Wash.

"The first thing that we hear when people compare ownership to leasing is, 'It's just too expensive.' And I think that couldn't be further from the truth," Scully said.

According to Scully, fleet managers need to understand the hidden costs of ownership, which can come from many directions. "They look at this payment, which rolls everything up into one payment. Being able to pack it all together and get a flat stream in terms of payment, you have to really teach the customer how to understand that."

The Cash Flow Question

Particularly in a time of economic slowdown, companies are concerned with cash flow.

According to Palmer, operating leases allow fleet managers to better budget expenses. "There are no surprises," he said. "They can look at it and say, 'Here's my expense'."

"I think one of the reasons is predictable cost," agreed Scully. "That's a great value. In your business today, if you can't forecast and budget and put that cost structure into your pricing model, you can't be competitive."

Robert Harper, vice president and general manager of LeasePlan ADVANTAGE, pointed out the tax benefits of leasing. "Sales tax is paid on the monthly payment rather than upfront as is done on a purchase," Harper said.

"They've got to remember that there is a definite advantage for tax purposes in leasing as opposed to buying," Palmer agreed.

In addition, leasing allows a company to use its cash more effectively, according to Harper. "Instead of putting a company's dollars into a depreciating asset like a vehicle, leasing allows a company to invest in plant and equipment and expansion that will return more on its investment," he told Business Fleet.

Harper pointed out that leasing also provides the opportunity for off-balance sheet financing -- which doesn't affect the financial ratios of the company (current assets vs. current liabilities). "The leasing company becomes another lending source, thus not affecting the lessee's existing bank lines," Harper said. "And the lessee can write off the entire lease payment as a business expense."

"We have a lot of companies that, because they've had rough use or high mileage on the vehicles, we'll use a 12 percent residual on a finance lease and, in essence, through a lease, what they've done is depreciated the vehicle down to 12 percent over two or three years," Palmer said. "They couldn't do that if they owned it. Of course they're actually expensing their lease payments as opposed to depreciating the vehicle," Palmer said, "but by doing that they're sheltering more of this year's income."

"We're saying, 'Put that money in the bank'," Scully said. "Put it in equipment that generates revenue for your business, or let it earn interest. Let your business pay for the vehicle on an even basis, month to month, and generate revenue from it.

"If you can take a piece of your business -- such as your vehicles -- and understand exactly what it's going to cost you for the next 36, 60 or 84 months and not have to manage it, you can take that time and put it into your business where it really belongs," Scully told Business Fleet. "Vehicle ownership can take time and attention away from the business."

Leasing Expertise

With a lease, you can also have someone who handles the vehicle purchase, paperwork and negotiations, as well as the resale -- ensuring that you get the best value on both ends, according to Palmer. "Whereas if they have to sell their own vehicles, they tie up their time in marketing them," he said. "And their money is tied up until they sell the vehicles."

"Many smaller companies aren't going to have someone on staff who knows how to buy cars correctly," said Jeff Barron, vice president and general manager of Ellis Brooks Leasing, Inc., San Francisco, Calif. "And that means not only correctly on specs, but how to buy them right what they should pay for a car on factory order on a fleet basis."

According to Barron, every good leasing company is buying the vehicles below invoice. "We're getting the cars to our customers that typically are below what they could negotiate on their own if they just walk into a dealership," he told Business Fleet.

And when it's time to resell the vehicles, "A good lessor is going to help them pick and choose the right vehicles to minimize depreciation, with their experience in the used-car market," Barron said.

"We're going fight for every last dollar, and do what we can to maximize the resale," Keeler said. "Whereas, if they own the vehicle, they still have to deal with trying to sell it in a market that they don't know. We do know the market, and we're going to tell them, 'Hey, this is not the right time to sell. You're best to wait for another month or two, because we think that sport utilities are going to firm up, and this is when you need to make your move'."

According to Barron, many decisions by small companies to acquire vehicles are made out of pain: "Our truck just broke down; we need a new one. Let's go out and get one tomorrow."

"Those are the kinds of decisions where usually you either pay too much, or you get the wrong vehicle," Barron said.

"Whereas if you've got someone watching your replacement cycle, your cycle of leases, they're ordering the vehicles three months before the current one expires, and they're getting the right specs and the right colors at the right season. They're doing whatever upfitting is necessary before it arrives at your front door. And they drop off the new one, pick up the old one, and off you go," Barron said.

"There is a tremendous convenience factor to leasing over any of the alternatives," Crawford said. According to Crawford, the overall relationship between a fleet and a leasing company goes far beyond the lease vs. buy question. "We're helping them run their business," he said. "We're helping these people make good decisions."

Crawford says his company doesn't tell fleet owners what to do, but rather gives them the facts to help them make the right choices.

Value Added

With leasing companies, you can, in effect, outsource your fleet management responsibilities.

Through utilizing the services of a small-fleet oriented company like LeasePlan ADVANTAGE, the lessee can also receive the benefits and cost savings of ancillary services, according to Harper. These services include maintenance management, fuel programs, pre-registration, accident management, and driver record management. "The lessee can outsource the administration of the small fleet to the lessor, thus allowing the lessee to focus on their core business," Harper said.

"Most of our clients don't have a dedicated fleet administrator," said Stodden Danelius, product manager at Wells Fargo Fleet Services. "A fleet management company can outsource all of that, so their employees can concentrate on their own business, and not on managing their fleet."

According to Danelius, it's a "We'll manage your fleet while you mange your business" philosophy. "So they can increase their employee productivity, letting us handle the license and title and consolidated billing, and all of the services that a fleet management company provides," he said.

"We've heard a lot of our customers say, 'I don't want to be in the vehicle business. I've got a business to run here, and I don't have time for all these vehicle issues'," Danelius told Business Fleet. "Our primary target is smaller fleets, so we hear that from a lot of our customers."

"What it really comes down to, as a leasing company," said Crawford, "is how much knowledge do you have? What kind of services are you providing? If you're just trying to market leasing, then you're in trouble, as far as I'm concerned."

As Crawford points out, the vehicle marketplace is quite complicated, with a myriad of choices. "Where are you going to get good, unbiased information?" he asked. "Where are you going to go to talk to somebody who's going to help you make good choices for your company?"

Crawford said his business points out to clients how important it is to get the right vehicle to do the job -- and then helps them do so. "We bring value to the table," he said. "They're going to listen to us, rather than listen to someone who doesn't know what they're talking about. Those are the kinds of things we market."

According to Crawford, with smaller fleet accounts, he typically deals with the owner. "And the owner became the owner of that business because he was probably really good at either being an engineer, or a construction manager, or a good salesman. But when it comes to vehicles, he started off maybe five years ago with two or three, but now he might have 12 or 15 or 18, and the whole thing's getting away from him.

"So we go in and say, 'We're the people you want to talk to. We're going to tell you the truth, and at the very least we'll give you the facts you need to make a good decision. If you start wavering and getting too far afield, then we'll tell you that you are making a mistake.' That's what we market every single day," Crawford said.


Copyright (c) 2001 | Bobit Publishing
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