If you work for a field service firm that needs to replace its fleet’s vehicles, you face an often-tough decision: to lease or to buy? David Koelsch, a certified automotive fleet manager and fleet management consultant, has been helping firms both big and small manage their fleets and make similar calls for the past 18 years. So we called him up to ask for some tips for those of us looking to acquire new vehicles.
How has the current economic situation affected companies’ decision-making regarding replacing their fleet’s vehicles?
I think they would turn to leasing, because conventional credit is difficult and banks have such a higher level of scrutiny to loan money. There are a couple of basic reasons people turn to leasing: One is if they just don’t have the capital to buy the fleet. The other is that they can use the money in a different way and get a higher return.
Besides not needing as much initial capital, does leasing also cut down on management expenses?
Sometimes it does and sometimes it doesn’t. I think it just makes for an easier answer, especially for smaller fleets. I know some leasing companies, if I talk about this, they get really mad. They sell very well and they go in and they promise: “We can save you this” and “We can save you that.” It seems very appealing and it’s very turnkey. In that sense it’s just an easy solution, so a lot of people will go for it. And some people do even maintain a fleet professional within the company — and they’ll still lease.
Are there any drawbacks to leasing that people don’t pay enough attention to, or should think about more carefully before they decide to go that route?
Sometimes people think leasing is some magic thing. I think it gets oversold a little bit. Some people get excited because the leasing company salespeople come and say: “Look at this. You can do this operating lease and just show it as a cost,” like it’s somehow easier, tax-wise. But they seem to downplay the fact that if you own the equipment, you can write it off as depreciation. Plus, you still have the operating costs of fuel, maintenance and repairs that you also get to write off.
I think, generally, any time I’ve ever looked at leasing, if you just look at the cost of obtaining the equipment, it’s always cheaper to buy it yourself than to go through a leasing company. It has always come out that way and the reason is because leasing companies have profit centers on the front and the back end, as well as monthly service fees that add to your overall cost. So if you have the ability to manage the fleet yourself, and if you have the capital, you’re usually better off [buying]. People just won’t accept that because they want the easy route.
If you are going to buy for your fleet, is now a good time to be shopping for new vehicles?
It is, and it isn’t. If you need the vehicle, anytime is a great time to buy just because you have to have it. From a company decision, you’re not going to go: “I’m going to replace my fleet because they’re on sale this week.” It’s not that type of decision, so whenever the lifecycle of the vehicle is up, it’s something that you’re just going to have to do and make the best of it.
I think before we had all the issues with GM and Chrysler and Ford, the competitive pricing adjustments that they would allow were greater. They were just trying to move units, and now it’s not as good from that sense, but I still think you can get a good deal. The real key if you’re going to be purchasing the vehicles yourself is finding a good fleet and commercial manager within a larger dealership — a multi-line dealership — that’s going to work for you.
How about small or medium-sized companies that can’t really capitalize on economies of scale? Do you have any tips for them when they’re looking to acquire new vehicles?
They need to remember that anything, generally, over 15-25 vehicles, they’re a fleet as far as the manufacturers are concerned, and if they go in and find a good fleet and commercial manager, or if they’ll negotiate hard themselves, they can often get similar cost savings or competitive price advantages to what some of the larger companies can get. I’ve actually seen it flipped. I’ve seen smaller companies get better deals than larger companies, per unit. It really just has to do with negotiating skills.
You say finding a great person to work with at a dealership is essential. Do you have any tips for finding or maintaining a good relationship with such a person?
Word of mouth is a good indicator, and if you don’t find anything that way, I’d just reach out to them. What you’re looking for is someone that’s going to offer you a fair deal, that’s going to offer you cost-plus as far as your pricing, like triple-net. You’ll want to ask them about these things because the leasing companies will say, “We’ll give you the holdback money.” Well, the type of fleet and commercial manager I’m talking to will give you that holdback money, too, if you buy. Then also look at their relationships with the different manufacturers’ representatives and how long they’ve been in business.
You know, the leasing companies are tied to some dealerships and that’s where they’re getting the holdback that they’re going to give back to you and all these other things. I’ve been shocked. I think some people that work for leasing companies don’t seem to understand that, but the leasing company itself doesn’t buy the vehicles from the manufacturers. They have a relationship with a dealer, so they’re just a pass-through mechanism. And really if you go on the retail side — I guess you could say wholesale — if you go to the fleet and commercial, they can also offer you leasing options and some of these other things through the financial companies or businesses that they associate with. In my opinion a lot of it has to do with how savvy you are as far as managing your fleet. If you feel comfortable and you want to go it alone, the reasons for going through a leasing company are [fewer].
So what’s the bottom line when it comes to choosing between leasing and buying — what should managers keep in the forefront of their minds?
You just have to remember that at its core, leasing is a type of financing, and don’t think it’s something else. Remember that and then when you approach your decision, think about those things that the leasing company would offer you, like disposal, crash management, insurance management or any of those things. Remember that those are profit centers for the leasing company, and just think about whether you’re willing to pay for that or whether you feel [you’d rather] internalize. Because what can happen is you can go to a leasing company, and [soon] you’re managing the leasing company, you’re not managing the fleet.
Very informative article. I think that when it comes down to fleet leasing, it just all depends how much it would benefit the company that would be involved in it. Leasing has its advantages because than a company wouldn’t have to commit themselves to the vehicles and could get possible replacements at a later time.
Thanks Mike for the note. Are there types of lease agreements (length of term, etc) that you think work better than others?