To figure out exactly how you’ll pay for the vehicles that provide your livelihood requires some education and research. Depending on a fleet makeup, turnover, and capital budget, leasing may be an option, as long as you know what to look out for and when to walk away, experts say.
What should you consider before leasing a vehicle?
First, understand what you are getting yourself into, says Ed Kaye, co-founder and president of Access Commercial Capital in Lake Success, N.Y. Just as all transportation companies are not alike, neither are all leases or leasing companies.
“Make sure you’re dealing with a reputable firm, read the lease agreement, and ask questions before you sign,” he explains. Are there any mileage restrictions or prepayment penalties? What happens to your payoff if the vehicle is totaled or stolen? These are all important queries that should be properly addressed.
“If the answer you receive is different than the terms of the lease agreement, ask for a separate writing, in simple language, that memorializes your understanding,” Kaye says. “You may need it in the future.”
Jared Zimlin, business development director of Priority One Financial Services in St. Petersburg, Fla., says operators should consider two different questions when choosing: Do you intend to keep the vehicle or replace it a few years down the road, and does your accountant see a value in a lease versus a loan?
“If you plan to keep the vehicle, a loan or $1 buyout lease may be a better option as there’s not a large residual or balloon at the end of the term,” he says. “If you plan to trade the vehicle in, see if the lender or the dealership has a lease program that allows you to return the vehicle for a newer model at the end of the term.”
This way, you can ensure you are providing the vehicles your clients demand while only making payments based on the time you are using it, not based on the total retail cost.
The use of capital, or OPM (“other people’s money”), is not something to take lightly when you are trying to build and grow a stable business, says Andrew Aldridge, president of GPD Capital Services in Santa Clara, Calif.
Although it may seem obvious, many overlook the difference between a leased vehicle and a financed vehicle: Who owns it. In a lease, those who are funding the vehicle are the owners. When a vehicle is financed, the operator owns it.
“There are an abundance of things to think about when making the best choice for a particular business; these include the rate, sales tax treatment, accountancy treatment, title questions, registration issues, insurance requirements, and payoff consequences,” he explains.
Look Out! Potential Pitfalls
Kaye says: “Leases can be loaded with fees. Understand what’s due at the start and the end of the lease, how much you are responsible for, and if they are negotiable.”
Zimlin says: “Be sure to get full disclosure on rate, payment, fees, down payments, pre-payments, and end of term options. A reputable lender or finance company will provide this information. Also, some leasing companies and online lenders have language in their contracts that allows them to have a blanket lien on all assets. Read the fine print. What a buyer does not want to have happen is: You trade in one of the units you think you own free-and-clear only to find out, when you did the recent lease or loan, the lender placed a blanket lien on all of your assets. The bank could ask to have the note satisfied in full on the one unit to release the lien on the unit the buyer thought they owned.”
Aldridge says: “Watch out for early payoffs, misrepresenting APR, accepting a longer term that does not fit the asset depreciation value, excessive credit report pulls, and being offered an inferior funding program despite qualifying for a better one.”
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When and why is leasing the right choice?
This is a question to bring up with your accountant, says Zimlin, because they are the expert on your business’ overall financial picture and should be the one guiding the ultimate decision.
There are many factors to consider when trying to determine if leasing is the right choice for your operation —sometimes leasing is a good alternative to financing and has benefits, other times it does not. “Usually, the biggest advantage to leasing is how sales tax is paid and vehicle depreciation is accounted for,” Kaye says. He also sides with Zimlin on speaking to your accountant to figure out what is the best move for your company.
What is advisable for securing the best vehicle leasing deals?
Aldridge cautions business owners to make sure your funder knows your purchasing goals over the next six months, and to ensure the funder representative is solely interested in securing the best deal for your particular credit situation.
“Leases on commercial vehicles are usually disguised finance agreements with a $1 or $101 buyout,” Kaye says. In some instances, the leasing company will allow you to put the portion of the vehicle not calculated in the stream of payments on the lease, known as a residual payment, on the end of the lease; this can be as much as 20% of the sales price of the vehicle or more.
“Be careful, because if there’s a high residual, the entity signing (the company signing for the lease), and the personal guarantor (the company providing the lease), are responsible for payment at the end of the lease.”
One of the best things you can do is be prepared, Zimlin says. Many lenders and leasing companies will want to see at least three months’ worth of bank statements before deciding whether to lease you a vehicle. To speed up the process, be sure to have actual bank statements, not just an online print out, ready when you apply.
The underwriter will likely want to see beginning and ending balances, average ledger balances, as well as any Non-Sufficient Funds (NSF) fees. If you have multiple business accounts, send three months’ worth of statements for all accounts.
“Depending on the price of the unit, you may want to ask at what price point the lender will require financials like tax returns and a debt schedule. Most lenders will not need these under $100,000 to $150,000, but all lenders are different, so it’s best to ask up front so you can be prepared when applying,” he says.
What should operators look for regarding payoff terms and fees?
Most leasing companies do not rebate unused interest in the event of an early payoff, Kaye says. As with most deals in life, you want to get written confirmation you can prepay leases without penalty. If the leasing company does not agree to waive a prepayment penalty, it’s likely you will be responsible for the full payment amount for the remaining term.
The Search For Best Terms
As far as the best terms, there’s no universal answer. It should be whatever options best meet your individual needs. Just remember to consider the overall package, including the rate, term length, down payment, any advanced payments, pre-payments, end of lease options, or any seasonal considerations.
“It’s reasonable there’s no right to prepay in the first year of the lease and the penalty declines as payments are made; it’s not reasonable to be held to the full amount of the remaining payments if you are at the tail end of the lease,” he says.
You should never use financing or a lease for short term funding, Aldridge says.
Zimlin explains some lenders may have a flat pre-payment penalty or decreasing penalties.
“For example, on a 60-month term, the pre-payment may be 5% of the remaining balance for the first year, then 4%, 3%, 2%, and 1% respectively as the note gets closer to maturation. There are others who will require they pay the full stream for the first half of the term, then after they can pre-pay just the remaining principle amount.”
— Lexi@LCTmag.com
FYI: Pro Tips
- We are in an environment where rates are starting to increase. Sources recommend operators try and get pre-approved so you can lock a rate in if you’re considering purchasing a vehicle in the next 90 days.
- Unless you have total access to capital to use for purchases, learn as much as possible before deciding how to fund. Try not to over leverage the funding product by choosing a term too long for the asset.
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