“I run high miles on my vans, so leasing isn’t for me,” says Jeb Lopez of Wheelz Up. Lopez throttled his new business into overdrive in two short years, putting 45 vans on the road since 2012 to service his auto parts supply business. The vans average about 30,000 miles per year. What Lopez doesn’t know is that leasing could be for him.
Perhaps based on knowledge of retail leasing and the low mileage caps — and subsequent end-of-term overage penalties — or advice from a sales-oriented dealer, the idea that leasing isn’t appropriate is a common refrain from small business owners.
“We don’t mind miles,” says Jack Leary, president of Motorlease Corp., a fleet leasing and management company based in Connecticut. “There is always a fleet leasing program that will recognize actual fleet usage. We do closed-end leases at 70,000 miles a year if the client needs it. As long as we can estimate the vehicle’s residual value, we can give clients what they need.”
Leary is referring to the fact that the two major commercial lease types — closed- and open-end leases — are written specifically to the duty cycles of each fleet. “[Fleet administrators] will pay for what they consume, but they’re not penalized for high mileage,” he says.
Separate from sourcing fleet vehicles through dealerships, Motorlease and other fleet management companies specialize in commercial leasing for fleets of all sizes. However, while the vast majority of commercial leases written at the dealership level are closed end, both Ford (CommerciaLease) and Ally (ComTRAC) offer customizable open-end leases.
Not only is leasing an option for small fleets, in high-mileage situations, it may be more advantageous than purchasing. “There can be a tax advantage to leasing over financing for high-mileage fleets,” says Tom Coffey, vice president of sales and marketing for Merchants Fleet Management.
To comply with FASB accounting standards and IRS rules, automobiles purchased for business must be depreciated over a five-year period. Fleets running high miles, say 30,000 miles a year, may decide to cycle out of the vehicle in two to three years. In certain circumstances, “You’re very possibly looking at a capital loss on your books, a charge against earnings,” Coffey says.
From a leasing perspective, fleets are still limited on how much you can write off, Coffey says, but generally have the flexibility to write off more of the capitalized cost of the vehicle quicker than an ownership situation.
Leasing is also beneficial in two-thirds of states that are “use-tax” states. In those states, companies pay use or rental tax based on the monthly payment, not the acquisition price of the vehicle. With a lease in these states, you’re paying tax on the portion of the vehicle’s value that you’re using in fleet, as opposed to paying the full tax upfront in an ownership situation. This is a particular benefit for high-mileage fleets that cycle vehicles more quickly.
Commercial fleet leasing does not require a down payment, and certain leases offer “off-balance sheet financing.” So for new and rapidly growing businesses such as Wheelz Up — especially ones with high inventories and carrying costs — leasing frees up capital for core business needs instead of tying up lines of credit. “Growing businesses need that cash,” Leary says.
“We can help scale up your business without having to outlay all that cash,” says Travis Mjolsnes, director of business development – small business and vehicle solutions for GE Capital Fleet Services.
For new fleets that have been bombarded over the years with advertised come-on retail lease deals, education on commercial leases is part of the challenge. When you add in the money down on a retail lease and potential fees or adjustments at lease termination — or considering that the buyout of the vehicle may be prohibitively high — “You’ll be paying for it ultimately,” Mjolsnes says, adding that it’s important for fleets to break down their total vehicle expenditures to cents per mile.
When some of these facts were brought up to Jeb Lopez, he acknowledged some of leasing’s benefits. “I'm going to take a look at it again,” he says. “I'm going to research before we purchase more.”
Originally posted on Business Fleet