Leasing vs. Purchasing: Making the Right Choice for Your Utility Fleet
When the time comes to add new vehicles to your fleet, the question of whether to lease or buy can seem daunting. The challenge of determining the best financial fit for your organization may feel overwhelming, but historically low interest rates have made leases increasingly attractive. Low interest rates are really just one consideration, however; cash flow and budget considerations, tax advantages, warranty coverage, cycling considerations and even concerns over a company’s image can factor into the overall decision. While utility fleets – especially regulated ones – traditionally have opted to purchase, more and more are successfully venturing into the world of leasing, allowing them to redirect capital expenditures in support of other revenue generating activities. So, how can you decide if leasing is right for your fleet? And if it is, what factors and strategies do you need to consider when deciding whether to lease or buy?
Before you make any decisions, it is important to understand your options, the benefits and limitations of leasing or purchasing, and the effect each will have on how you budget and plan. In the most general terms, when you are making the choice, the question comes down to how much money you will need to finance. When you purchase, you are choosing to finance the entire cost of the vehicle. With a lease, you are only paying for use of the vehicle, which is determined by the difference between the purchase price and the projected value of the vehicle at lease-end. This typically means that if you purchase, the monthly payments will be higher because the amount you are financing will be larger. If you want cash flow flexibility, leasing may be a better option for your fleet. It may also give you potential tax advantages and allow for cash preservation. Unlike a purchase, however, you will not own the asset at the end of the lease term.
Open-End vs. Closed-End Leases
The terms of a purchase – and the financing supporting it – are almost always fairly straightforward. But with leasing, the first choice is whether to select a closed-end or open-end lease. With a closed-end lease, the leasing company takes on the risk of what the value of the vehicle may be at the end of the lease term. The contract usually establishes an annual mileage allowance, and the fleet turns in the vehicle at the end of the contract term. In this situation, fleets may have to pay for excess mileage and any excessive wear and tear, depending on the contract terms. While this arrangement does not allow the same kind of flexibility an open-end lease would provide, it does allow for a certain amount of predictability because you pay a single flat rate for the entire lease period.
Comparatively, an open-end lease provides significantly more flexibility but comes with increased risk. That is because the fleet assumes responsibility for the value of the vehicle at the end of the lease term, rather than the lessor doing so. These kinds of leases also generally do not come with mileage allowances, which can be a benefit. And, fleets can choose both their lease terms and between either fixed or floating interest rates; with a closed-end lease, traditionally both the term and the rates are fixed for the life of the lease.
Consider the Application
While important, the decision to lease should not be about numbers alone. Utility fleets should also consider what kinds of applications would be well suited for their leased vehicles. For the most part, vehicles with predictable mileage and driving patterns – think pool vehicles or vehicles used for meter reading – are a good fit. These are also often vehicles that serve as the public face of an organization, so being able to have a set time frame when you cycle them in and out of your fleet can be important.
Leasing may also be a good option if your fleet is considering sustainable options, especially electric utilities seeking to meet their 5 percent EEI spend. For example, if you have a portion of your budget set aside for the acquisition of sustainable vehicles, rather than using those budget dollars to purchase two heavy-duty hybrid-electric vehicles outright, utility fleets could consider leasing plug-in electric vehicles for their meter reading applications. In that case, you know the vehicles will be traveling a set number of miles along predictable routes, and your fleet can help promote your company’s investment in sustainable solutions.
Evaluate the Situation and Run the Numbers
Ultimately, there is no one-size-fits-all approach for a utility when it comes to deciding whether to lease or purchase. A savvy fleet manager will always take the time to consider the current market, the needs of the fleet, senior management’s appetite for change, and the budgetary requirements or restraints that may be in place. Keith Gindoff, manager of fleet and energy services for Piedmont Natural Gas, has both leased and purchased vehicles for his organization. “At the end of the day, you need to do the analysis,” he said. “You need to ask the tough questions, run the numbers – especially pertaining to the possible resale value – and really evaluate what is best for your fleet.”
About the Author: Bill Doman is department head for sales support for ARI (www.arifleet.com), a privately held fleet management company headquartered in Mount Laurel, N.J.
Lease or Purchase – What Should You Consider?
• What is the current market environment? Are rates favorable for leasing?
• How much risk can your organization tolerate?
• What is your budget profile? Are you looking for increased flexibility or cash flow?
• What kind of regulatory environment do you operate in? What kinds of restrictions will that place on your decisions?
• What types of vehicles are you looking to lease? Are the applications well suited for leasing?
• Would leasing present an opportunity to also support other company initiatives (e.g., sustainability goals)?