The age old question regarding your truck fleet is whether it makes more sense to lease or buy the trucks. The age old answer is that it depends.
It depends on your fleet size, the type of trucks you run, and your appetite and ability to maintain the trucks. It depends on your ability to negotiate good lease terms or your ability to come up with a down payment on the purchase of a truck. It depends on how long you plan on using the truck, and how many miles you intend to drive. So many depends.
In this article we will dig into each of the “it depends” items, and break them down one by one. The lease vs. buy question is asked often, in this article I will attempt to provide clear answers to help guide your decision making process.
Should I lease or buy my trucks? There are two broad ways to answer the question:
- Quantitatively, by studying the numbers and financial aspects of each option
- Qualitatively, by considering business factors other than numbers
The Numbers
In my experience, from a purely financial standpoint, it makes more sense to buy your trucks. You own the asset, and retain the equity in the vehicle. The cost of financing of a truck is almost always going to be less than the monthly lease cost.
However, you also own the obligation to maintain the asset. It’s the obligation to maintain the asset where you can run into headaches. Trucks are machines and require regular service. Sometimes, trucks break down on the side of the road and require road calls, on-site repairs or towing. The cost of maintaining the trucks can be significant.
To run the analysis on the numbers, compare the financial elements of the lease terms to a purchase:
- Lease: Base lease cost and cents-per-mile maintenance charge
- Buy: Cost of financing a new truck and estimated internal cost per mile for maintenance
Lease. The base lease cost is going to be a fixed amount that you each month. This amount won’t change whether you drive the truck 100 miles or 10,000. The cents-per-mile charge is variable, and covers the cost of maintaining the vehicle. For every mile you drive the truck you’ll pay a fixed amount. The good news is that you’ll know exactly how much maintenance will cost you. The bad news is that every mile you drive, the expense meter keeps running.
Buy. The cost of financing a truck will depend on a variety of factors: cost of the vehicle, amount of the down payment required, interest rate, and loan term. I will dig into the numbers in a future article, but believe me, the cost of financing is always less than the base lease cost you’ll pay to the leasing company.
So, that leads us to the key differentiator between the lease and buy decision – the variable fleet maintenance cost. The key question to ask and answer is: how much does it cost you to maintain your own trucks? The problem with this question, is that most distributors have no idea what their average maintenance cost per mile is.
If you have owned trucks previously, and have a record of your maintenance and expense records, the calculation should be easy. Simply divide total maintenance costs by total miles driven. You can use a one year period, two years, etc. The longer the better, because you’ll be comparing this average cost per mile to the cents-per-mile maintenance cost from the leasing company. Maintenance costs fluctuate – fewer costs with a newer truck, more costs with an older one – so it’s helpful to compare your own historical costs over a longer period of time.
Factors Other Than Numbers
“The core concept of a full service lease option, is that we (leasing companies) are in the fleet maintenance business, and our customers are not, and they shouldn’t be. Outsourcing their fleet to a full service lease provider allows clients to free up executive talent within their organization for more productive functions.” – Jon Dumas, Ryder Transportation
We have worked with Ryder for many years to structure our truck leases. The quote above from Jon Dumas sums up nicely the qualitative benefits of a lease arrangement. Leasing companies are in the fleet maintenance business. Beer companies are in the business of selling and delivering beer. In many respects it makes sense to partner up, and allow each company to do what they do best.
From a qualitative standpoint, the key factors in the lease vs. buy decision making process come down to asking yourself a few basic questions: Do you want to deal with maintenance issues on your trucks? Do you want to deal with truck downtime, road calls, and the hassles that go along with keeping a machine running?
If you answered no to the questions above, a full-service lease can eliminate these headaches. A full-service lease gets you peace of mind and predictability: your truck fleet will be taken care of, and you’ll have a trusted business partner by your side to help you when equipment breaks down. A professional leasing service company will handle all maintenance issues, provide a spare truck when needed, and conduct any road calls to deal with break-downs.
Decision Time: Lease or Buy?
In our company we have worked with both lease and buy scenarios for our truck fleet. In a nutshell, I prefer to own and maintain our trucks. Operationally, it was cumbersome, but financially it was significantly better than the lease scenario.
When we owned our own trucks, we had the benefit of a full-time, on-site mechanic. He would keep the trucks well-maintained and would do road-calls if a truck broke down during a delivery. An owned-fleet with a full time mechanic worked very well for us financially and operationally.
Over time, our mechanic retired, we closed down the garage and transitioned to a leased fleet of trucks. The relationship with our leasing partners was good. The lease terms, service levels and overall relationship was mixed.
In the end, I prefer to own and control our own assets. It is debatable whether time, energy and money spent on owning and maintaining a truck fleet is the best use of resources, but in our case, I believe it was.
Do the analysis and determine the financial components of the lease vs. buy equation. Understand what you are getting into with a lease contract – fixed costs, variable costs, length of commitment. Understand the costs of ownership and make your best estimates on the costs to maintain your trucks.
Bottom line, only you can decide what is best for your company. For us, it was an owned-fleet, for you? Who knows, but everyone in the distribution must answer the age old question: should I lease or buy my trucks?