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Cash, Finance or Lease: Which Truck Acquisition Strategy Works Best?

Determining the acquisition strategy that works best for individual company fleets is a daunting process. Industry experts pose and answer questions to help fleet managers make this important decision.

May 2011, Work Truck - Feature

by Sean Lyden - Also by this author

At a Glance
When acquiring medium-duty trucks for fleet, fleet managers need to decide between:
  • Cash: The potential for lower acquisition costs, greatercontrol over depreciation, lower insurance costs, and tax benefits.
  • Financing: The finance option offers many of the same ownership benefits of the cash purchase, while allowing the ability to conserve cash by providing the means to pay off the balance over time.
  • Leasing: A lease finances the use of a vehicle; [loans] finance the purchase of a vehicle.
When it comes to truck acquisition strategies, one size does not fit all. There are several factors to consider, including vehicle replacement cycles, tax strategy, and corporate accounting, just to name a few. Even within the same fleet, some trucks are better suited for finance and others for lease, depending on the type of equipment upfits, special financing or leasing offers at time of acquisition, and anticipated mileage.

How should fleet managers determine whether to purchase, finance, or lease the next truck? What is the best way to discern which is the better deal?

Here's an overview of how each strategy works and the pros and cons of each to provide a guide to evaluating truck acquisition options.

CASH PURCHASE

Must cash be available to purchase a truck outright?

"Many small firms don't have the large amounts of cash needed for major capital acquisitions in the first place," said Ken Sibley, CPA, founder and managing director of Dallas-based accounting firm Sibley and Company. When cash is not an option, fleet managers look to financing or leasing to conserve cash and spread out truck payments on a monthly basis for a specified term.

If cash is available, what are advantages to purchasing trucks outright?

Potential for lower acquisition cost. When a vehicle is financed or leased, interest charges, leasing fees, etc., are added to the vehicle's acquisition costs. When a fleet purchases a vehicle outright, those fees are not charged. 

Greater control over depreciation. Depreciation is the difference between the original purchase price and the proceeds received at vehicle resale. When a company owns a vehicle outright, it controls the resale pricing, with the potential to sell it at retail pricing versus wholesale.

Lower insurance cost. With loans and leases, the bank or leasing company will require low insurance deductibles, from $250-$1,000, which can drive up insurance costs. When a company owns a vehicle outright, it controls what the deductibles will be. The higher the deductible, the lower the cost.

Tax benefits. Vehicle purchases may qualify for bonus depreciation and/or IRS code Section 179 expensing. (See sidebar on page 28.) Consult the company's CPA for specific recommendations.

Is paying for a truck in full the best use of a
company's cash?

"It really boils down to, 'If I don't use this cash for this purchase, what will I use it for? And what is the opportunity cost associated with that?' " said Mark Smith, strategic consulting services leader for GE Capital Fleet Services.

Sibley agrees. "A straight cash purchase using a firm's existing funds will almost always be more expensive than the lease or loan options because of the loss of use of funds."

How should a fleet determine whether or not to pay cash?

"When deciding whether to pay cash or borrow to purchase trucks, take the after-tax return on investment in the business and compare it to the after-tax cost of borrowing," explained Bill Smith, managing director, CBIZ MHM, a New York-based full-service certified public accounting and management consulting firm to Fortune 500 companies. "If a company earns 10-percent gross on whatever is pumped back into the business, and pays a 40-percent combined tax rate, the after-tax return is 6 percent. If borrowing at 10 percent and the company is able to deduct the amount, the after-tax cost is 6 percent. In this example, paying cash or borrowing is a 'wash' because it costs 6 percent to keep money out of the business and 6 percent to finance the trucks."

Therefore, the variables to plug into an analysis are the tax rate, gross profit, and borrowing cost (interest rate). If a company's after-tax profit is greater than the finance or lease cost (the cost of borrowing), then money produced by the business is best reinvested in the company.

Comments

  1. 1. WestMinsterNational [ February 20, 2013 @ 09:42PM ]

    I found an informative post which contains truck financing tips. Trucking business is a huge project. There is first thing for financing a truck that all tax returns are up to date. Thank you for sharing this article.
    http://www.westminsternational.com.au/it-equipment-finance.aspx

 

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