How to decide when lift truck leasing is the right way to go
Leasing is one of four options you have when deciding how to pay for one lift truck or a full fleet. You need to evaluate several factors to choose well and generate positive cash flow.
By Gary R. Forger -- Modern Materials Handling, 4/1/1998
By most accounts, leasing is a hot button when it comes to lift trucks. Suppliers are reporting dramatic increases in the number of leases with some saying they account for 60% or more of new lift truck deliveries.But as strong a trend as that is, you still need to make a careful evaluation of lease terms and conditions and decide how it fits (or doesn't fit) your company's needs. There are, after all, three other alternatives-rent, buy with cash, and buy with financing. And as the person who will help guide your company's decision, you need to know both the financial and operating reasons for choosing one over the other.
Interest in leasing today is due in no small part to its combination of two financial benefits attractive to many companies.
First of all, leasing generally lowers monthly payments below methods other than paying cash. But unlike cash, leasing does not deplete working capital that could be used for other business purposes.
Secondly, leasing typically allows you to pay for only what you use.
"Leasing is nothing more than buying the use of a piece of equipment for its useful economic life in a specific application," says Warren Eck, sales development for Yale Materials Handling Corp.
Although there are three basic alternatives when it comes to lift truck acquisition, the lease vs. buy decision is the one that generally receives the most consideration.
In fact, renting is generally considered to be the best way to go when a company is most interested in either short term use or wants to try a particular lift truck before buying. There are, in addition, some financial considerations that might be important and would make renting a viable option (see table). However, most of these except temporary avoidance of debt can be accomplished by leasing.
In the lease vs. buy evaluation, cash flow, credit lines, and profit and loss statements all enter into the final decision.
"Although a cash purchase may provide the lowest total cost, other factors should be considered," says Darlene Harrington, Raymond's manager of leasing.
A cash purchase reduces the amount of capital that could be used to acquire other assets which can earn a return. "Leasing allows a company to keep its cash available for those other investments, making monthly payments the primary cost of lift truck use," says Harrington.
Deciding to lease or buy with financing brings in other considerations. The latter not only requires cash but reduces the company's credit line for the duration of the loan. Buy with financing also means the debt is carried on the balance sheet.
With leasing, however, there is usually no initial cash outlay, limiting costs to the monthly payments. The company's credit line is not affected by a lease.
Yale's Eck says there is still another balance sheet consideration to factor into the lease vs. buy decision.
He explains that a lift truck purchase is usually considered a capital expense under I.R.S. guidelines and can be depreciated over time. A lift truck lease, on the other hand, is usually structured to qualify the equipment as an operating expense that can be written off.
Dotting i's, crossing t's
In fact, the structure of the lease is all critical once the buy option has been eliminated. There are different types of leases and various conditions included in them. A company needs to select the one that is most appropriate for its needs.
A long-term lease (also known as long-term rental) is written to realize all of the benefits of a true lease for tax purposes. At the end of agreement, the equipment returns to the lessor. Depending on the lift truck supplier, various maintenance agreements can be included, ensuring that those costs are as predictable as possible. In fact, maintenance provisions can be included in most standard leases.
A residual or equity lease is a true lease that ends with a buyout option. By using the lease payments to build equity in the equipment, a company can purchase the lift trucks for a fraction of their value at the end of the lease. It is especially important to know up front the ultimate cost of buying that equipment. Particular attention should be paid to expected maintenance costs (a major engine overhaul, for instance) at that point in the equipment's service life.
A guaranteed residual lease (also known as a modernization lease) is written to expire at the same time that the lift truck would reach its maximum use/efficiency point on the ownership cost curve. At that point, the equipment would be replaced by a new model and a new lease.
Within these standard leases, the length of the agreement can vary. Common durations are 24 to 72 months. And while most initial lease payments are due 30 days after signing, arrangements can be made to extend that delay to 60 or 90 days.
Operating conditions detailed in the lease can also be tailored to your needs.
As Clark dealer Doug Atherton explains, "If you run your trucks 150 hours a month, make sure the lease does not specify 50 hours per month for each truck. If you exceed the maximum you'll pay a penalty for every hour beyond the number of hours named in the contract."
Additional conditions and costs to evaluate are late payment penalties, periodic escalation clauses, documentation fees, responsibility for wear and tear, and return provisions.
A company also needs to take into account its potential future operational needs, says Yale's Eck.
"For example, a company leases a 5,000 lb capacity truck but its operations change and an 8,000 lb truck is needed in the middle of the lease," Eck says. "Will the company have to live with the smaller truck because it's too expensive to cancel the lease?"
In the final analysis, leasing is a viable route for many users of lift trucks today. However, there is more to the decision than just dollars and cents. So be sure to understand all of your company's lift truck related needs before signing on the dotted line.
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