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The Financial Benefits of Leasing
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The question of whether to lease or own any asset is asked, or should be asked, at any
company. And when it comes to a fleet, the question can get complicated.
There are pros to both ownership and leasing. It all depends on the individual company
and its unique situation. Here we’ll take a look at some of the major ways a company can
benefit economically from leasing its fleet vehicles and receiving assistance with day-to-day
management duties.
Cash Flow and Capital
Since a lease is, at its core, an agreement to pay the owner for usage over a period of
time, it stands to reason that a significantly smaller amount of money is needed to meet that
need than if an asset is purchased outright. If a company chooses to own, it must do so by
either using its own capital or a loan. Either way, the company’s balance sheet takes a hit
(lower on the cash side or higher on the debt side), simultaneously making the company
less attractive to potential investors or lenders and potentially handcuffing plans to grow the
business elsewhere.
A well-written lease agreement eliminates this issue by reducing fleet costs to a monthly
operating expense, while keeping credit lines clear and cash on hand to re-invest into
the company.
There are pros to both ownership and leasing. It all depends on
the individual company and its unique situation.
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The Financial Benefits of Leasing
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Open vs. closed-end lease
There are essentially two kinds of leases: Open-End leases and Closed-End leases.
Open-End leases are generally shorter in term—they usually last about a year at minimum
and continue on a month-to-month basis thereafter. These leases avoid long contracts, but
usually come with some amount of risk at the end of the lease for the lessee. Closed-End
leases generally run longer (typically around three years), but the lessee bears no risk
whatsoever at the end of the lease, which is why these leases are also known as “walk
away” leases.
Most open-end leases come with a Terminal Rental Adjustment Clause, or TRAC. A
TRAC ensures that at lease end, the lessor is guaranteed a pre-determined value for the
automobile upon sale. If the price it’s sold for is more than this value, the lessee will get
the excess. However, if it is less, the lessee is responsible for paying back the difference.
Therein lies the inherent risk of the Open-End lease.
With a Closed-End lease, the owner of the vehicle, or the lessor, bears 100% of the
responsibility for the vehicle at the end of the lease. This lease may be slightly more
expensive in month-to-month costs, and most Closed-End leases are subject to mileage
restrictions and “wear and tear” penalties. But, the costs are fixed, allowing for budgetary
stability and peace of mind that comes from knowing that at lease end there is nothing that
the lessee needs to do.
Closed-End leases generally run longer than Open-End leases,
but the lessee bears no risk at the end of the lease.
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The Financial Benefits of Leasing
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Administration
Vehicles are ultimately the responsibility of the owner. Therefore, everything from taxes
owed to license renewals are duties that must be dealt with by the titleholder. When leasing
a fleet, all the paperwork and record keeping are done by the lessor, leaving the lessee to
concentrate on his or her business.
Maintenance
Many leasing partners offer programs to ensure the routine maintenance of fleet vehicles,
including roadside assistance. These programs are usually covered with a flat monthly fee,
allowing the lessee to build the cost into his or her op-ex budget. But another, perhaps less
obvious benefit is the fact that most leased vehicles fall on the newer side, naturally resulting
in fewer maintenance issues in the first place and less down time overall.
Incentives and Discounts
Acquiring vehicles at reasonable costs is both a learned skill and a time-consuming task.
The right leasing partner has the advantage of negotiating these deals for a living, as well
as the advantage of repeat business and ongoing relationships with dealers, resulting in a
more favorable purchasing position. This allows the lessor to lease vehicles at a lower rate,
ultimately lowering the lessee’s month-to-month fee.
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The Financial Benefits of Leasing
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Fuel and Online Management Programs
Today, many leasing partners offer online management tools to track a fleet’s costs, history
and lease terms, along with other necessary information. These tools have made fleet
management much less time consuming, and more timely, resulting in reduced costs. It also
helps fleet managers to monitor expenses related to running a fleet much more closely and
accurately, so problem areas can be identified and dealt with immediately.
Fuel programs are also commonly offered and can help to control spending at the pump
by providing tools like regular odometer reading updates, which can help monitor
consumption. Fuel programs also often provide preventative maintenance scheduling and
fleet cycling, which can help to control fleet costs over the longer term.
Fuel programs help to control spending at the pump by providing
tools that monitor consumption.
Value Leasing
Another way to benefit further from leasing is to look into what some leasing providers
call their “value leasing” programs. Simply put, these are late-model vehicles that typically
look and perform “like new,” yet can save the lessee up to $100 per month, per vehicle,
depending on the type of vehicle and the terms of the lease. Many of these vehicles even
have remaining coverage under the original manufacturer’s warrantee.
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The Financial Benefits of Leasing
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Tax Benefits
Despite not owning the assets, leasing can also provide tax benefits to a company, which
vary depending on the type of lease.
With an operating lease (the most common type of lease when it comes to commercial
enterprises), the lessee is able to treat the lease payments as an expense on the income
statement, with the lease obligation footnoted on the balance sheet disclosure. In this way,
the lessee is able to gain significant financial tax benefits without the full lease obligation
affecting the balance sheet.
Alternatively, in a capital lease, the lessee is treated as the owner for tax purposes. By
assuming some of the risks of ownership, the lessee is able to claim depreciation on the
asset each year, and deduct interest expense of the lease payments.
Company Image
A less tangible financial benefit to a leased fleet is the ability to keep a more modern, reliable
and better-looking fleet on the road. It can sometimes be overlooked that a company’s fleet
is a representation of the company itself, and a fleet consisting of vehicles of varying quality,
age and looks can sometimes send a message of inconsistency. Additionally, companies and
drivers will benefit from more up-to-date technologies, improved safety features and better
fuel economy.
With an operating lease, the lessee is able to gain significant
financial tax benefits without having the full lease obligation
affecting the balance sheet.
6. 1.866.6LEASES • 1.866.653.2737 • www.merchantsfleetmanagement.com
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