Q: Can you explain how fleet incentives work? With some fleet cars, our customers pay full price and then are supposed to get an incentive back. Sometimes it takes 30 days or six months to receive the incentive and not all customers receive it.
— Tom Siddons — 1st Source Bank, South Bend, Ind.
A: Wikipedia defines incentive as “something that motivates an individual to perform an action.” The manufacturers pay incentives to the rental companies to get them to buy their cars — hopefully in large quantities. How these incentives are applied to the price of the car depends on the manufacturer and the fleet supplier.
We believe part of this is an accounting game played for the benefit of investors, Wall Street and the government. When GM and Chrysler went bankrupt, one of the causes cited was the number of vehicles sold to rental fleets and the pricing of those vehicles. In order to create the appearance that this is no longer the case, the manufacturers are paying their rental fleet incentives later in the sales process.
For example, let’s say a manufacturer sells 100 cars to a rental company at fleet invoice, which is a clean dealer invoice. When those cars are delivered and paid for, they look like 100 cars sold to a dealer on the manufacturer’s books. They are reported as being sold at full dealer invoice.
Then 30 or more days later, the rental operator or fleet company receives a check for the additional incentive. The manufacturer records it as an expense for advertising or something else. Therefore, it looks like the manufacturer is not discounting cars to the rental car companies.
Investors are happy, Wall Street is happy and the government is happy. But rental operators are not so happy. The rental operator has been paying interest on the manufacturer’s incentive for at least a month and possibly as long as six months. Part of the rental operator’s credit line has been tied up. If rental operators do not apply the funds appropriately, they may be in violation of their funding agreement.
Additionally, some of the lenders require the rental account to put 20% to 30% down. If the incentive money is $2,000 per car, the rental account still has to put 20% of the incentive down or $400 per car and then wait 30 plus days for the incentive money to be returned. This is an additional expense to the rental operator.
In addition, we also see incentive programs where there are smaller payments at different times — with each payment having different requirements in order to qualify for them. It is almost as if the manufacturer is hoping the rental operator won’t fill out the appropriate paperwork and won’t qualify for the incentive. There was a recent case where a group of rental operators were buying cars through an association and did not get their incentives because of a paperwork problem.
Several years ago (1990s), it was standard practice for manufacturers to sell their fleet vehicles for one price and send the rental operators incentive payments. These payments were often paid directly to the owners of the companies. Some people viewed (correctly we believe) these payments as bribes. A few unscrupulous individuals took advantage of this to the detriment of their companies and funding institutions.
This behavior led to strict lending agreements that have been expanded to the rental company, the fleet supply company and the lender. Eckhaus Fleet has established a guarantee agreement with all rental car lenders that guarantees all funds received from manufacturers (that are due to rental accounts) will only be paid directly to the lender — unless instructed by the lender in writing to do otherwise. This gives the lender another layer of protection.
When you buy cars, you need to know who will receive the incentive payment and when, what your funding source’s requirements are and if the incentive program has any requirements before payment is made.
For the 2014 model year, to make it easier on Eckhaus Fleet’s Hyundai and Volkswagen customers, the price has the incentive deducted from their cost (fleet invoice minus incentive). In this case, Eckhaus Fleet is advancing the incentive money to the rental company and then waiting for the manufacturer’s reimbursement at no extra cost to the customer.
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