The Winners and Losers of Vehicle Acquisition Costs

May 5, 2020

With the changing economy, business leasing has become a hot topic. Companies are looking for ways to preserve cash and reduce costs. This blog discusses how companies realize real savings when leasing vehicles through a Fleet Management Company (FMC). This blog also discusses the impact the 2020 economic downturn has on the value of vehicles both new and used.

1. Working Capital is Improved Through Leasing

In uncertain times, cash is king. Cash in the bank helps business owners sleep at night. Leasing allows companies to preserve their capital. Businesses avoid using their line of credit or bank credit facility to finance vehicles. The FMC retains title to the vehicles. The lessee simply pays for the use of the vehicle. Because companies are only paying for the portion they use the vehicles, their monthly payments are lowered through leasing. 

2. Lease Payments are Lower than Bank Financing

In leasing, you only pay for what you use and not the entire purchase price. Because of this, payments are notably lower and the amount of cash tied up in vehicles is greatly reduced. When you buy vehicles and finance them, your payments are based on the full value of the vehicles plus taxes up front. Your monthly payments are higher and you build equity over time but it takes quite a while to overcome negative equity. Buying ties up your capital in a depreciating asset.

For a fleet of vehicles, lower monthly payments allow you to operate more leased vehicles for the same cost as financed vehicles. Leasing also allows you to turn vehicles more often, which means your repair and maintenance costs are lower, and downtime is greatly reduced, improving productivity, sales and/or customer satisfaction.

3. Think Differently about Vehicle Value

The current economic downturn leaves some vehicle winners and losers on the table.  Buyers of used vehicles win as values are down approximately 10-12%.  It's a great time to acquire used vehicles.  New car incentives will increase but have not meaningfully dropped at this point.  Used cars and trucks are great options for companies looking to save on fleet expenses and many late model low mileage vehicles are available.  Rental car companies are de-fleeting substantially as well putting downward price pressure on used vehicle values.

4. Pick Vehicles with Lower Total Lifecycle Cost

The number one mistake people make when selecting a vehicle is focusing only on acquisition costs. A proper analysis will take the total lifecycle cost into consideration. Lifecycle cost includes acquisition cost, cost of operation, and disposition value. The type of vehicle or options selected impact resale value. For example, an extended cargo van costs $900 more initially but yields a $1,500 premium over a traditional van at resale resulting in a total cost that is $600 lower on that vehicle. If acquisition were the only factor considered, it would appear that standard van would have cost less. 

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By expanding the analysis to two factors, the decision is drastically different. The other factor, cost to operate, includes costs such as annual maintenance expenses, annual fuel consumption, insurance costs, and financing costs. Certain brands of vehicles may have a low acquisition costs, but their annual repair and maintenance costs exceed any savings on the front end. FMCs are not tied to any brand and will recommend the vehicle that is right for your situation. FMCs consider total lifecycle costs when making vehicle recommendations with an eye toward saving companies money.  This is a holistic approach that will lead to informed decision making.

5. Deploy Vehicles for the Right Term, and Not Past It

The secret sauce for minimizing TCO (Total Cost of Ownership) is knowing when to dispose of your vehicles. It’s the art of knowing when the depreciation rate (purchase cost less resale value) over time is at its lowest and before the more expensive repairs begin. Older vehicles typically cost more than new vehicles at some point.  Older vehicles have risk of catastrophic failure of engines, transmissions, and emissions systems. Identifying that point drives replacement vehicle cycle timing.

FMCs have the ability to write leases that are flexible and can be customized to meet the needs of your business. If it makes sense to turn your vehicles every three years or every seven years, a lease can be written accordingly.

6. Use FMC Discounts and Rebates

There are three ways to acquire a vehicle in terms of price: retail, fleet, and large fleet rebates. Fleet discounts and rebates are different from retail incentives. Fleet rebates significantly outweigh retail rebates 99% of the time. A fleet of 15 vehicles qualifies for fleet rebate status with most OEM’s. A good FMC can acquire fleet vehicles, maximize rebates, and minimize vehicle cost.

Dealers may be good for transacting one vehicle at a time, while FMCs have greater buying power and larger OEM fleet rebates.

7. Factory Order

Factory ordering allows you to select exactly what you need and nothing more. When you buy off a dealer’s lot, you pay for options you don’t need and don’t add value at the end of the lease. Don’t overpay for features you don’t need or colors or options that hurt resale value. If you have immediate needs for a vehicle, FMCs search the country to find the vehicle that best matches your specs. If used vehicles are the best option for you, FMCs have access to many used vehicle channels including auctions.  FMCs can also provide guidance on whether used vehicles make sense versus new and offer enough savings to justify the additional risk.

8. Save Sales Tax in Most States through Leasing

In most states, sales tax is only paid on the portion of the vehicle used. The residual value is NOT taxed resulting in significant savings. When purchasing, sales tax is paid on the entire value of the vehicle and the taxes are paid up front. You save when you pay sales tax only on the value of the vehicle you actually use.

9. Income Tax Benefits are Greater With Leasing

Operating lease payments for vehicles used primarily for business are generally 100% business expenses. If you purchase a vehicle or finance a vehicle, they are depreciated over time and depreciation can be limited due to “luxury auto” limits defined by the IRS. Tax rules are complex and ever-changing. It is best to consult your tax advisor to determine which rules apply to you. Be sure they know the type of lease you are looking at so they can provide the best advice.

10. Save Time, Energy, and Administration. 

In addition to the financial benefits of leasing, there are opportunity cost benefits to leasing. FMCs handle the buying, selling and upfitting tasks, saving your team precious time and headaches. FMCs handle the banking and financing of the vehicles. It is truly a turn-key process and one-stop shop experience. Additionally, a well-run fleet program ensures vehicles are more reliable and have less downtime, which means fewer emergencies and ultimately an efficiently run operation. FMCs also offer nationwide title and registration services.

Work with an FMC to maximize your savings. Not only will you save time and money through leasing, your fleet vehicles will be newer, safer and more efficient. You will have more time to run your company and make long-term/strategic decisions knowing your FMC is watching the fleet carefully. 

If you’re like most converts, you’ll ask yourself why you didn’t make the switch years ago!