As is often the case with any new car rental business, Race Funk had to get financially creative to build his fleet. In the beginning, he connected with a wholesaler who was desperate to unload a bunch of used vehicles. “He decided he’d finance us and take a chance on a handshake,” Funk says.
Funk bought 26 cars from him and hung his shingle as Action Car Rental in Orlando along with partner Michael Ghassemi. The plan was to operate for two years and walk into a bank with solid financials. But he opened in 2008 — it’s funny how a Great Recession will scuttle the best-laid plans. “At that point, the banks weren’t doing anything,” Funk says.
The wholesaler kept Funk afloat through the lean years. “We got cars with low miles and he’d finance them for us, at a high interest rate, but it was his money,” Funk says. “We couldn’t go to the bank and get cheap money.”
Then Funk was contacted by a Chrysler dealer who had cars to move, which led to a small line of credit with Chrysler Financial. “Now you’re reporting,” Funk says. “They’re not putting out the welcome mat and dusting off the chair, but at least the lights are on.”
The Chrysler Financial deal prompted the connection to Marple Fleet Leasing. With Marple, Funk now had three sources to stock fleet, poising his company for growth. And with leasing, Funk was able to conserve capital — a precious commodity for a company just starting out.
The story of Action Car Rental’s beginnings is not unique, as banks are not too willing to lend to any company without a track record. Leasing companies have similar approval criteria, but because they own the vehicles, they may not be willing to write a lease for a newer company.
Leasing isn’t only used by car rental companies starting out. For many established independent and franchised companies, leasing is another financial instrument to put wheels on the road.
Both open- and closed-end (see definitions) are used in rental. In a used car market with some uncertainty, a closed-end lease might be preferred, as the cost of the vehicle is predetermined for the rental company.
As well, the closed-end lease can be written “off-balance sheet,” which would allow the rental company to pursue a bigger line of credit or use capital for other expenditures.
In a closed-end lease, operators and lessors say it’s important to understand the potential charges and the parameters and fees associated with disposal.
The operators we spoke to generally prefer open-end leases, as they say they are confident in their abilities to come out ahead by disposing of the vehicles themselves.
“In closed-end leases, you have to worry about mileage and dings and scratches when returning to the leasing company,” says Paul Smirnov of EZ-Go Car Rental, serving greater Baltimore. “If I sell them, I can make money.”
Smirnov uses Madison Capital and other sources. Madison provides him the option to either finance or lease. The EZ-Go fleet is 70% financed and 30% leased, Smirnov says. Smirnov rents the cars for up to two and a half years and then retails most of them on his sales lot.
A key benefit of leasing is to take advantage of the leasing company’s buying power, which will give rental companies better capitalized costs on vehicles than they could achieve themselves.
“Being an independent, you have an opportunity to compete with the big boys,” says Robert Bentley, an ACE affiliate serving Jacksonville, Fla. Bentley leases through Courtney Leasing and Marple. “This next year is not going to be the easiest,” he says, in reference to a softening used car market. “Getting that extra discount in the [lease] deal makes it easier to get out of those vehicles.”
Kamal Fereg, owner of America’s Best Car Rental in Ft. Lauderdale, Fla., says he is able to obtain an interest rate (or “money factor” in leasing terminology) when leasing, which is similar to the one afforded him in a financing situation. Other operators say that while they might get a slightly better rate from their lender, the low cap cost in a lease more than makes up for it.
“You might save 2% on your money, but if you’re saving $3,500 on the car, how much does that 2% really cost you, especially in a short term of 12 to 18 months?” asks Funk.
A Collaborative Effort
Rental companies also use leasing to fleet up with used units, which works well to meet peak demand windows while taking a smaller depreciation hit. This is not always possible when financing, especially if trying to use a manufacturer’s captive finance company, which is often restricted to new cars.
Fereg says Marple has offered him some good lease deals on used units with low miles, and he has leased used with a six-month term to fleet up for his busy season.
While rental companies must abide by the manufacturers’ rules for keeping vehicles in fleet for a minimum term, after that, the rental company has the flexibility to sell at an optimal time.
“You look at the payment and you look at Manheim [market value],” says Fereg. “If Manheim can get you more than the payoff, you should sell it.”
Operators say they appreciate the collaborative efforts of the lessors when it comes to taking advantage of fleet opportunities. “Leasing requires less work than financing my cars,” says Youssef Aziz of Auto Boutique in Miami, who uses Fleetway Sales & Leasing. “If I call Fleetway and say I want 100 cars, they are going to do all the work for me. I’m not the one looking for the cars, they are.”
“We were really short last Christmas on minivans and [Marple] helped us on some turn backs at auction,” Funk says. “They got 20 vans to me in four days.”
Do Your Homework
EZ-Go started in 2011 and does a lot of cash rentals, which allows Smirnov to charge a minimum rate of $50 a day. His first leasing experience (with a different company) was rocky. The leases were written for three years, his money factor was high, and “I realized that I overpaid around $3,000 per vehicle,” Smirnov said.
He also got hit with unexpected fees. “Make sure to get the fee structure upfront,” Smirnov says. “Make sure to read the contract.”
But Smirnov admits that being a new operator, he didn’t have a lot of leverage — and he understands that the leasing company is taking a bigger risk with newer clients. “When your company is more established and you are getting more lending companies interested in you, your deal will be more competitive,” he says. “Now that I’ve been working with them for a while, I only have to keep the vehicles for 12 months instead of three years. And there are no more hidden fees.”
Funk has learned that transparency is tantamount. “[The leasing company] gives us a cap cost so we know what we’re paying going in,” Funk says. “Then they show me my depreciation each month and how it is broken down.”
A Learning Curve
“During our first year, no one wanted to work with us,” Smirnov says. In his second year of operation, he says he met new leasing and lending sources at the International Car Rental Show, and the door was open. Now Smirnov is able to compare deals between companies.
Similarly, now that his company has a track record, Funk says he’s had other lending and leasing sources contact him. He’s expanding his credit line with Chrysler, though he’ll continue to lease with Marple. “You don’t want to put all your eggs in one basket,” he says.
“It’s still a learning curve for me on leasing, up-fleeting and getting rid of them,” Funk says, adding that his leasing company has aided in this regard.
“We still haven’t ‘made it,’ if you will,” Funk says. “We scratch and claw each and every day to make this work.”