Leasing vehicle fleets effectively and efficiently is simple if you follow five key leasing strategies.
1. Select the right lease type and terms for your use. 2. Select the ideal vehicles to optimize total cost of ownership. 3. Time the acquisition of your vehicles to minimize costs. 4. Have an exit plan before you acquire vehicles. 5. Take advantage of the benefits leasing has to offer.
Read on to learn how you can adopt these strategies and start saving time and money today.
1. Right Lease Type and Terms
Business leases are not consumer leases. Business leases are designed around the intended use of the vehicle. The use is defined by the number of miles driven and the anticipated wear and tear on the vehicle. Business leases, or open-end leases, have no mileage or damage charges. A lessee bears the risk for the value of the vehicle at the end of the lease and has the benefit of the equity that is built up during the time of the lease. Consumer leases, or closed-end leases, by contrast, include mileage and damage charges. In closed-end leases, the lessor bears risk for the value of the vehicle at the end of the lease and the lessee has no claim to equity. Mileage and damage charges are often much greater than the actual loss in value of the vehicle.
Knowing which levers to pull is essential to structuring open-end leases that are best for your company. Start by asking such questions as:
- Approximately how much will the vehicle be driven each year?
- On average, how are the vehicles used, and what condition will they be in at the end of the lease?
Considerations such as these can be used to determine the estimated value of the vehicle at the end of the lease, which is termed residual value. This value determines how much a vehicle depreciates each year, which, in turn, defines monthly payments. Setting the right depreciation rate (residual) will reduce risk of having to pay at the end of the lease. The answer to what your residual value should be depends on your company goals and objectives.
- Are you trying to increase your monthly cash flow?
- Are you looking to minimize risk at the end of the lease?
- Do you want to build equity over time and increase your tax deduction?
- Is there a chance you will end the lease early?
The levers are clear. The actual depreciation is a fixed amount (acquisition cost less residual value). The estimated residual is the variable that drives your monthly payment. Set a low residual, and your monthly payments will be higher and you build equity; set a high residual, and your monthly payments will be lower but you may have to pay more at the end of the lease. In both cases, the total amount paid in is the same before the impact of income tax deductions.
2. Ideal Vehicle Selection
Selecting the right vehicles will optimize your total cost of ownership. Many companies make the mistake of buying based on driver preference rather than what is best for the company. For example, if a driver wants an unusual or trendy color, this choice can negatively impact resale value. Perhaps you choose to buy for appearance. You like the look of a new KIA Forte model but fail to take into account the resale value or reliability of the vehicle. Some vehicles may cost less on the front end. However, when you take the resale value and repair and maintenance costs into consideration, the actual cost of ownership is higher than a vehicle that costs more on the front end.
Another common mistake is relying on Consumer Reports. CR does not look at the total cost of ownership (TCO), but rather focuses primarily on safety. The two must be balanced. Corporate fleet drivers are typically safer drivers than the average consumer. Most vehicles have backup cameras and side airbags as standard features. Consumer Reports may rate certain safety features higher, and, therefore, certain vehicles climb above others on the list. The incremental safety factor most likely does not outweigh the additional cost.
Fleet Management Companies (FMCs) help to find the ideal vehicles for you and features your team needs. They can make the process of vehicle selection simpler and eliminate the mistakes in selecting vehicles that are common.
3. Ideal Timing
When acquiring vehicles, it is important to understand when new model years will be rolled out and when new body styles and safety features will become available. A client wanted to acquire a new vehicle immediately in July. We explained that if you wait one to three more months, the new model year will be available with a redesigned body style and significant safety feature enhancements. The lease payment will most likely be the same or less, but in only a few months this client would have a “year old” model in terms of model years rather than the most recent model.
If you plan properly, you can specify the exact vehicle you need and factory order it.
4. Know Your Exit Before Your Entrance
It’s important to plan how long you’re going to retain a vehicle and when it’s best to get rid of it. The fleet management program should include expected holding periods for all categories of vehicles in your fleet, defined by years and miles.
To determine how long to keep a vehicle, you must determine when the annual depreciation and repair costs are at their lowest. This is precisely when you should sell; before the vehicle incurs that expensive repair due to age and before the resale value drops substantially. When it comes to selling, timing is everything.
The value of vehicles decreases throughout the holding period, but not evenly. There are certain triggers during the life cycle of a vehicle that causes a steeper decline in value, known as the “value cliff.”Value cliffs include mileage benchmarks (like hitting 100,000 miles) or changes in body style. Your vehicle needs to be sold before it hits specific cliffs and its value drops significantly.
5. Lease, Hold Cash, Maximize Tax Benefits
Leasing allows you to preserve capital, use it for strategic reasons, and deploy capital when opportunities present themselves allowing you to capitalize on those opportunities. Leasing also provides sales tax savings in almost every state and dramatically improved income tax benefits.
Leasing provides you with several other advantages. It allows you to turn vehicles more frequently and run your operations using newer vehicles. Operating with newer vehicles will reduce repair and maintenance costs as well as fuel costs. Newer vehicles are equipped with the newest safety features and technology. Further, lease agreements are often three to five years, making it simple for you to replace your fleet vehicles often. You will have less administrative tasks to manage since all of the work to spec, acquire, upfit, and finance the vehicles is completed by the leasing company.
FMCs are your advocate and provide companies with important guidance on topics like how long to keep vehicles, which vehicle options make sense, and how to remarket vehicles to maximize sale prices. This is the essence of the total cost of ownership mindset that reduces fleet costs immediately and makes a major impact on the business bottom line.
Contact Doering Fleet Management to discuss how you can begin improving your fleet operations today!