Two very successful HVAC contractors take opposing positions in this issue. One leases; the other purchases.
The contractor who likes to lease says: “We do three-year leases on new vehicles. We do not do excessive mileage. Our vehicles always look new, we have very few repair bills (as they are under full warranty) and virtually no down time due to vehicle failure. We use our cash to generate profits in our business as it is not tied up in our vehicles. At the end of the lease we are not stuck with a vehicle we don’t want so we don’t have the hassle of selling it.”
The other contractor points out the advantages to buying: “We keep our vehicles a minimum of five years. We maintain the vehicles well. We get five years out of outfitting our vehicles. We put our branding on them and racking and shelving. We have an asset at the end of the day. We believe that this is significantly cheaper than leasing because we commit for five years and of course we have the option of continuing on at our convenience. We trade the vehicles at a time of our choosing.”
Fleet management businesses are growing. They provide businesses such as HVAC contractors with an array of services such as capital leases for vehicles, seasonal leases, step-up leases, vehicle purchases and a host of other services. They work directly with the auto manufacturers to get deals for their clients. For example, the Heating, Refrigeration and Air-Conditioning Institute of Canada has a member partner program for fleet management and vehicle leasing with Addison Fleet. If you’re a member of any professional groups, check with your association to see what they offer.
Fleet management businesses also provide solutions for operating costs. Do a comparison between them and going directly to car dealerships. At your next association meeting talk to some of the other contractors and see what they are doing.
If you do decide to lease, make sure that you negotiate the payments. Historically, dealers get higher prices when they make a lease agreement rather than sell a vehicle. That additional $20 per month, tagged on to a monthly lease payment that many don’t try to negotiate, adds up to almost $1,000 over 48 months. Leasing contracts are not standard documents; you need to understand the fine print on each page. A common clause in lease agreements is the number of miles you can drive and the penalty for exceeding that limit. Can you live within the mileage limit? Build in an allowance for exceeding the limit. Driving an extra 20,000 miles during a four-year lease at 20 cents per mile will cost you an additional $4,000.
When you purchase a vehicle, dealers will usually try to get you to let them finance it. Unless they are offering very attractive rates as part of a promotion, you will generally be better off using bank financing. Compare the cash price to the financed price.
- Don’t get into a lease unless you are sure that you need the vehicle for the full term of the lease.
- Don’t get into a lease unless you understand and accept all the terms of the contract.
- Don’t get into a lease if you intend to make major modifications to the vehicle.
- Don’t get into a lease if you are likely to damage the vehicle because of the type of work you do.
- Don’t get into a lease unless the residual (“buy back”) value is defined and reasonable.
- Don’t pay list price. Don’t pay an excessive interest rate.
But do consider:
- Once you decide what vehicle you want, shop around for the best deal.
- Make sure you know the charge for excess mileage — try to get it waived.
- Know the buy-out value at the end of the lease.
- Be aware of any restrictions and what you have to do at the end of the lease before returning the vehicle.
- Check with an association. Maybe they have a preferred program with certain dealers or fleet management companies for members.
- If at the end of the lease your vehicle is in good condition, consider renewing the lease or buying it out. That way you will get extended value for any modifications or branding.
When returning a vehicle at the end of the lease, make sure you return all the bits and pieces that you got with it. Try to get a checklist from the dealer. A missing key fob can cost you $800. Missing floor mats, cargo mats, GPS equipment, owner manuals, luggage crossbars, cargo covers and wheel rims will cost you.
If you are leasing a replacement vehicle, you should find a dealership easier to deal with as they will see the benefit in the continued relationship.
To make your decision making process clearer here are some key elements of a capital lease:
- If you are a high-mileage user there is no penalty.
- If there is going to be excessive wear and tear on the vehicle there is no penalty.
- Lessee retains full equity.
- Lessee can use the equity at the end of the lease toward a replacement vehicle.
- There is no early termination penalty, thus allowing more flexibility on an ongoing basis.
The biggest risk for the lessor is that the market value of the vehicle at the termination of the lease is the residual value. This is where the early termination, high mileage and the excess wear and tear come into play.
Check with your accountant before signing a capital lease. Ultimately the decision to buy or lease is a trade-off decision that you must make depending on your specific circumstances. Weigh the pros and cons and go with whichever route makes the most sense for your business and your drivers.
The differences in whether to buy or lease is not a decision that is going to have a huge impact on your business. However, you should always negotiate for the best deal and make sure you are managing your operating costs effectively. Paying too much never makes sense. The longer term financing for purchasing vehicles that is now available can make the difference between a lease and a purchase a lot smaller.