Originally appeared in Fleet Owner
In a previous FleetOwner blog, I spoke about the lease vs. buy decision. This time I thought it might be helpful to review of a couple more common leasing options available for transportation equipment
The most common lease financing options for transportation equipment are broken into two primary classifications: operating leases and capital leases. Operating leases typically act like rental agreements and capital leases are more like loans. This is an oversimplification, so I will break it down a little further.
One of the key considerations in lease financing is tax depreciation. Tax treatment plays a major role in the leasing and finance world. Lessees and lessors will utilize tax depreciation to shelter/reduce income to lower their tax liabilities. So, when considering what type of lease would be best for your organization you need to understand the impact tax depreciation has on the overall equation. A company with a high tax rate and a healthy bottom line will value depreciation more than an organization with a lower tax basis.
Operating leases will give the lessor the tax benefit and capital leases will give the lessee the tax benefits.
In an operating lease the lessor will pass on the tax benefits to the lessee in the form of a lower monthly payment, but the lessee cannot claim the tax depreciation.
The key points to evaluate in lease financing are the asset cost (purchase price), the term of the lease, the interest rate and the residual value of the asset. I always say that procurement, operations, finance and legal need to collaborate with each other when evaluating asset acquisition and financing options. You need to choose the right asset, determine the proper lifecycle, and understand ALL the market influencers that will affect the equation.
Calculating lease payments is straight forward, so that is why I always tell clients that there are the numbers associated with a lease and the words in the contract. Both have equal importance. What may seem like a super lease payment may have contractual terms that will make the lease cost more in the end. Legal review is a critical component to all financing transactions.
Operations is the department that can be overlooked in evaluating your financing options. It is critical that your operations team is involved in every step. Asset operation, performance and lifecycles will have the largest impact to TCO.
Evaluating what lease financing option is best for your organization can be complex, so it is critical to have a financing partner that can walk you through the process and provide you with a suitable outcome.
Patrick Gaskins, senior vice president of Corcentric Fleet Solutions, oversees both sales and operations for Corcentric’s fleet offerings. Over the past 10 years, Gaskins has grown the fleet services area of Corcentric’s business by implementing a best-in-class asset management database and a data-driven approach to providing Corcentric clients with visibility into all areas of their fleet spend. He joined Corcentric in 2010, bringing over 30 years of experience as a financial services professional in the transportation industry. Gaskins leads a team of industry experts who work with a supply base of over 160 manufacturers to help the country’s largest fleets manage all aspects of their fleet operations and fleet-related spend. Gakins earned his BBA in Finance from the University of Miami, Fla., and his CTP certification from the National Private Truck Council.