More companies turn to full-service leasing as an alternative for truck, tractor acquisitions

April 1, 2010
LEASING is giving carriers financial flexibility, which is critical in a volatile economy that is showing signs of life but still struggling. In these

LEASING is giving carriers financial flexibility, which is critical in a volatile economy that is showing signs of life but still struggling.

“In these challenging economic times, many companies find they must use existing lines of credit to pay bills or to make payrolls as their customers take longer to pay on their accounts,” says Chris Maccio, director of sales-East for PacLease. “Or they must have access to ready sources of credit. That ready access will allow them to take full advantage of new business opportunities quickly should stimulus efforts by governments in North America and around the world boost the global economy. Even with good credit ratings, a surprising number of businesses both large and small find that banks scrutinize their requests closely. That's why preservation of existing credit lines is so critical to their operations.”

As financing remains challenging, Maccio says he is seeing more companies turn to full-service leasing as an alternative — primarily for trucks, as opposed to tank trailers. Full-service leasing like that offered by PacLease allows companies to reserve their lines of credit. It also allows them to acquire trucks equipped with the latest technology designed to save fuel, reduce emissions, and enhance driver productivity.

When it comes to financing commercial vehicles, banks can be particularly reluctant since trucks can quickly depreciate in value, especially when they are not specified correctly, Maccio adds. Also, since truck-loan default rates are higher among owner-operators, bank loan officers tend to lump all truck-loan applicants into a higher risk of default category.

“Banks tend to hesitate when it comes to trucks because they don't know the industry as well as we do,” Maccio says. “Our business is to understand trucks. We work with our customers and Kenworth and Peterbilt engineers to determine the best truck specifications. Our goal is to optimize a truck's residual value and performance and minimize its operating expenses. Plus, PacLease is part of PACCAR's financial services segment, which has total assets of $10 billion and an AA credit rating. So, we're well capitalized to offer any size company a variety of leasing options.”

Debt to equity

Olen Hunter, director of sales-West for PacLease, says before banks and lending institutions make new loans or extend additional lines of credit to businesses, they typically establish certain debt-to-equity ratio requirements. These requirements can help them feel more confident about their customers' ability to repay their loans.

Any time a company borrows money to buy assets, such as trucks, the company must record the loan on the liability side of its balance sheets as well as the truck(s) on the asset side, Hunter says. That can impact productivity ratios or profitability ratios such as return on investment (ROI), return on assets (ROA) and return on equity (ROE). Some banks may look at a company's ROA and ROI to determine the interest rate or premium they will charge. Investors and stockholders also look closely at ROAs and ROIs.

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“Companies that borrow money should be concerned with maintaining best-in-class ROA and ROI ratios,” Hunter says. “If your company has depreciating assets, like trucks for example, and you don't generate an improved return or profitability for each dollar you invest in those trucks, your financial ratio will be out of order not only for internal reporting, but also for all of your company's future financial needs.”

Creditors and lenders look at ROA and ROI ratios to determine a company's productivity and profitability. That's important because most companies have a limited amount of capital they can borrow. If they borrow that capital to acquire trucks, then it can't be used for projects or opportunities, Hunter says. Full-service leasing allows companies to use their leasing provider's money to finance the trucks. That leaves companies free to use their borrowing capacity for projects or other revenue-generating endeavors.

“Through full-service leasing, your company can greatly improve its balance sheet by minimizing the number of assets it's using to produce a certain amount of income or profit,” Hunter adds. “So, your company's balance sheet will look much more favorable.”

Full-service leasing can also reduce the costs of truck ownership. Hunter says many financial decision-makers are under the misconception that full-service leasing will cost their companies more than buying trucks and taking care of the maintenance themselves.

“That's not usually the case,” he says. “With a full-service lease, your company pays for the use of the truck, rather than the truck itself. That can mean a big savings in both time and money over ownership.”

In a lease, the cost of the vehicle, apportioned tax and license, finance charge (set interest rate for the lease term), and calculated cost-per-mile maintenance expenses, minus the calculated residual value determine your monthly payment.

Hunter says company owners, finance officers and fleet managers are usually surprised to find that the per-unit cost with full-service leasing is often less than the per-unit cost of owning their trucks and maintaining them.

“When we sit down with our customers, we ask questions to try to understand what drives their costs and then determine ways we can help them develop efficiencies in their operation through the right truck specification choices,” Hunter he says. “For example, we sat down with a fairly large steel distribution company based out of Los Angeles (California) and found that payload was the company's most important measurement of success. Every pound we could take off the company's leased truck was another pound of product they could haul to their customers.”

In the past, the company leased trucks from another leasing company that took more of a “one-size-fits-all” approach to their truck specification needs, he says.

“As a result of taking measurements of one of the company's trucks, we provided the company a Peterbilt 386 with an optimized wheelbase and durable, but lighter weight components,” he adds. “The optimized wheelbase and lighter weight components allowed the company to haul more steel and as a result the company made more money with that truck.”

Hunter says there's another misconception about full-service leasing among companies that own trucks. They often believe that by turning over responsibility of truck maintenance to a leasing company, they somehow will lose control.

“Nothing could be further from the truth,” he says. “Companies that have switched from truck ownership to leasing trucks from us have found that when we maintain their trucks, their operations department can concentrate on their core business, and in many cases, improve on-time delivery rates.”