Choosing to purchase or lease equipment is a critical financial and operating decision for private fleets. After all, a private fleet's core business is not transportation; it is the product the compa...
Choosing to purchase or lease equipment is a critical financial and operating decision for private fleets. After all, a private fleet’s core business is not transportation; it is the product the company is transporting. Nonetheless, that doesn’t mean transportation is secondary to customer satisfaction.
Indeed, on-time deliveries and customer service are best achieved with properly specified, well-maintained equipment, a difficult proposition when trucking is not the core business of the fleet. Effectively running and maintaining a fleet of trucks and trailers requires specialized transportation skills, and equipment purchase and maintenance of company-owned equipment can drain resources.
While most agree there is no rule of thumb that says only certain types or sizes of companies can benefit from leasing, a full-service lease frequently can be most advantageous for private fleets, and some types of operations may stand more to gain, such as time-sensitive freight.
When researching leasing versus purchasing rolling stock, a fleet must first determine if the advantages of leasing will be beneficial to its specific needs, then explore the various leasing strategies.
The financial advantages of a full-service lease include increased buying power, reduced tax liability, lower-cost financing and predictable cash flows.
“There are certain financial advantages to leasing versus purchasing,” said Don Metcalf, Lease Product Marketing Manager, Penske Truck Leasing. “A fixed invoice offers an advantage from the standpoint of planning, and tax liabilities are reduced when a fleet doesn’t own the equipment. The fleet also doesn’t have its money tied up, which makes borrowing money for other aspects of the business easier.”
Metcalf also observed the buying power of lease companies.
“Generally lease companies have great relationships with manufacturers, because of the volume of business,” he said.
Tax implications also affect the decision to lease or purchase equipment. In some provinces, debt associated with a fleet is included on the year-end balance sheet as taxable debt. Capital tax, however, is not imposed on an operating lease (FSL) liability, as it does not form part of the balance sheet disclosure.
However, leasing equipment isn’t just about freeing up cash and tax advantages.
“It’s a one-stop shop” for all of a fleet’s equipment needs, noted Gene Scoggins, Vice President of Sales, NationaLease. “What we find is that trucking is a sideline for private fleets.”
Bob Williams, Senior Vice President of Sales for TIP, a GE Company, echoed his sentiments. “With a full-service lease, you are basically turning your transportation over to another company.”
“A fleet manager’s job is to maintain the equipment at the lowest possible cost with the highest equipment utilization,” Metcalf said. “This is our core business. With 200,000 pieces of equipment, we’re really running a large fleet, with a lot of history.”
Opting for a full-service lease can provide a number of value-added benefits. Among the options available from most leasing companies are preventive maintenance and scheduling; fuel services; emergency road service; seasonal/rental equipment; licensing, permitting and compliance; safety services; and various on-board technology options.
“Every customer looks at their business differently, and we can provide different solutions for different customers,” Williams said. “We can tailor our services to the customer.”
There are standard offerings as well as optional services, and a good leasing company will have the expertise to help fleets determine what value-added services they should choose.
“For most private fleets, outsourcing the maintenance capabilities” is the main factor in choosing a full-service lease, noted Bill Franz, President of XTRA Lease. “Most private fleets don’t have the luxury of their own maintenance facilities. We also find we provide value-added services they may not otherwise get, like untethered trailer tracking that provides the customer with the ability to have fewer trailers when they can keep track of them.”
XTRA Lease, like the others, offers round-the-clock breakdown service, another amenity not always readily available to private fleets.
“Equipment for equipment, some fleets might find it is cheaper to own, but when you add in the additional services it makes leasing very cost effective,” Franz related.
“We provide a strong preventive maintenance schedule, even if we don’t do the financing,” Metcalf said. “We also offer an extensive emergency road assistance program, washing, decaling, and, a whole issue to itself, environmental issues. We also have safety programs and maintain the fleet’s files.”
NationaLease also provides myriad value-added services.
“We have menu services that can be added in or taken out,” Scoggins explained. “We can customize those to a customer just as we customize the equipment for their needs.”
In addition to value-added services, a fleet should ask about the number of locations a lease provider has and check to see if those locations are in close proximity to the fleet’s location and delivery area, noted Scoggins.
Additionally, a fleet should inquire about the company’s Internet capabilities if interested in that service.
Other services a fleet should expect from a full-service lease provider, said Scoggins, include driver education, safety meetings; all the items a fleet manager would oversee.
“And here’s the big one: data collecting,” Scoggins added. “Is the company providing you with data on each truck – downtime, fuel reporting, etc. – that has become a hot topic in the last few months.”
Franz pointed out tires and brakes as important maintenance items that should be included.
Once a fleet has chosen to lease, it must then determine the length of the lease. Again, there is no general rule of thumb, but rather a fleet’s specific needs must be taken into account.
“There are different factors to consider, including number of miles traveled per year, specifications on the equipment and age of the equipment,” related Scoggins. “We have the experience to tell fleets when they should replace the equipment.”
“There is a general rule of thumb that the longer the lease, the cheaper the rate will be, because of the utilization of the asset for that length of time,” Franz observed. “But a fleet must keep in mind, do they need it that long. They should give careful consideration to how long they sign the lease for. Private fleet managers generally have a good idea of how long they need equipment.”
It should go without saying that careful consideration should be given to all aspects of a lease, although the lease companies we spoke with prefer to believe hidden charges and so-called “fine print” are a thing of the past.
“I strongly suggest a fleet fully understands what they’re getting,” Scoggins commented. “If a lease company says it is providing license plates, find out exactly what they are providing and make sure the costs are detailed.
“I am glad to say we don’t do it, but there are games out there,” Scoggins added, although, “Plain and simple there are things people just don’t think about – Is sales tax included? If so, how much, and is the rate correct? To summarize, the fine print should be noted and at what cost.”
Williams explained the value of choosing a reputable company to avoid the pitfalls of hidden charges. “Fleets need to choose a company that can explain the lease well enough so that the fleet knows what they are getting into and understand the value of the lease.”
A fleet’s journey through choosing a full-service lease provider does not end when the contract is signed. It is now time to track the performance of the company.
Metcalf suggests a few performance measures to track: equipment availability, how much downtime, billing accuracy and what equipment is available when you need it. Franz added response time to unscheduled services, quality of the equipment and response from the company’s personnel.
“The No. 1 performance measure is the availability of the equipment,” noted Williams. H
e said the leasing company should be tracking performance, too. “We want the customer to get the assets when he says he needs them. We want to measure what the customer wants us to measure.”
NationaLease’s Scoggins said performance clauses should always be written into a lease and agreed upon by both parties. “We use Key Performance Indicators (KPI) that are set up customer by customer.
The KPIs have to be specific and measurable. This gives both parties responsibility. And we can take action to correct a problem before it gets blown out of proportion.”
Leasing, particularly full-service leasing, has grown in offerings and use.
“I think the economic situation has driven our industry to look at savings,” Williams said. “Leasing is becoming more of an option now. Fleets have hesitated in the past because there is something to that feeling of ownership. When times were good, cash didn’t matter as much. But today, cash matters.” mt