As organizations continue to deal with the impacts of COVID-19, fleet professionals are looking for new ways to keep their fleet costs low. One of the most effective ways to reduce fleet costs and preserve cashflow is by leasing your fleet vehicles instead of buying them.
Should your business lease fleet vehicles?
There are three key questions every fleet professional should consider before ordering new fleet vehicles:
- Is there enough capital to fund my current and future vehicle needs?
- What is the impact on my cashflows over the life of the vehicle?
- Which option allows for more flexibility to invest in higher return projects?
According to Automotive Fleet, 80% of companies with mid-to-large size fleets lease their vehicles, while only 20% exclusively own their vehicles. Why? Leasing is more cost-effective in the short and long term. Expectations are that the Federal Reserve will maintain interest rates around zero through 2023. The favorable interest rate environment has led many companies to consider leasing their fleet for the first time.
Leasing vehicles can help optimize your fleet spend in several ways:
More control and less risk: Owning a vehicle gives you complete control over the use and resale of the asset. An open-end lease, however, can provide the same control and the gain/loss on sale remains with the lessee. This allows you to continue replacing/cycling vehicles according to optimal replacement timings for your specific fleet.
- Increased cash flow: Owning requires full payment of the fleet vehicle cost up-front. Leasing allows you to manage monthly payments allowing choices for interest rate (fixed vs. floating), amortization options, and cycling parameters. Avoiding paying the full cost up-front can help free up capital for your organization's other initiatives with a higher return on investment.
- Lower fleet Total Cost of Ownership (TCO): Upfront cost is higher when purchasing a vehicle whereas leasing only requires payment of the monthly lease cost. Net Present Value (NPV) of lifecycle cashflows are typically lower when leasing vehicles compared to buying them. Considering all other fleet vehicle expenses such as maintenance, accident, fuel, and financing, a managed program through a fleet leasing and management company can be 10-15% less expensive than ownership.
- Tax benefits: Owning a vehicle requires full up-front payment of tax. In Canada, and the majority of U.S. states, rental tax is applied to each monthly lease payment rather than the total vehicle price.
- Less administrative burden and access to leading fleet management technologies: Working with a fleet management company helps reduce administrative burden so you can focus on what matters most – your customers. They also give you access to the latest technologies and advanced analytics to help optimize your fleet's performance.
Next steps in reducing fleet cost with leased vehicles
In order to determine if leasing vehicles is the right option for your fleet, you should conduct a lease vs. own analysis to determine upfront cash requirements and the NPV difference between lease vs. own.
Element's Strategic Consulting team can provide a lease vs. own analysis to determine which option is right for your fleet from a quantitative perspective. If leasing is the right choice for you, consider a sale leaseback transaction to help ease the transition. Element can provide tailored fleet financing options that improve cashflow and deliver cost savings.