For most fleets, leasing offers the flexibility of ownership along with the cash flow and tax benefits of leasing. Fleet leasing allows you to free up other credit lines and maximize your free cash flow. Leasing your fleet vehicles also ensures that you have a predictable monthly cash flow and only pay for the portion of the vehicle that you use. By leasing you can also avoid equipment obsolescence, benefit from the latest and greatest safety features, and achieve savings by running newer vehicles with improved fuel economy.
So, you’ve made the decision to take advantage of all of these benefits and lease your fleet vehicles rather than buying them or reimbursing your drivers. But with several options available, how do you choose the right fleet leasing solution? First, let’s take a look at the different options available: open-end floating rate TRAC lease, fixed-term TRAC lease, and fixed FMV (closed-end) lease.
Open-end floating rate terminal rental adjustment clause (TRAC) leases offer maximum term flexibility to optimize cycling and give you the opportunity to terminate at any time after 367 days without penalty. These leases have a floating interest rate based that is based on actual market conditions rather than fixed for the term. With open-end floating rate TRAC leases, there are no return conditions, such as mileage restrictions or wear-and-tear penalties.
Fixed-term TRAC leases offer a fixed term and a fixed interest rate throughout the entire lease term. Similar to the open-end TRAC lease, there are no return conditions.
Fixed Fair Market Value (FMV) (closed-end) leases are available for both titled and non-titled assets, and similar to the fixed-term TRAC lease, offer a fixed term and fixed interest rate throughout the entire lease term. However, unlike TRAC leases, with closed-end leases the lessor assumes the residual risk rather than the lessee, so you will have less flexibility with mileage and wear and tear.
Now that you know what kinds of leases are available, you’re probably still wondering how you choose the right option for your fleet’s needs. Below, you will find a few questions to ask yourself to help you start making a decision.
Are you leasing over the road commercial vehicles, equipment, or both?
Depending on whether your assets are titled or non-titled, there are different lease options available. For cars, trucks, trailers, and anything with a title, open-end floating rate TRAC and fixed-term TRAC leases are both good options. For equipment and other non-titled assets, the fixed FMV (closed-end) lease is available.
How will you be using the asset and for how long?
The key to choosing the right leasing solution is to match the lease type with the needs of your fleet. That said, knowing how you will be using your vehicle and for how long will help you narrow down your options. If you know exactly how you will be using your vehicles and how long you need them for, a fixed-term lease may be the best choice because you will be confident setting a fixed term for your lease. But if you need more flexibility as far as your lease terms are concerned, you may consider an open-end TRAC lease.
How long do you want your lease terms to be?
Related to the previous question, this question will help you determine whether it would be a good fit to go with a fixed-term lease or an open-end lease. For example, if you know that you will need light-duty trucks for a two-year project, then a fixed-term TRAC lease may be the right choice. On the other hand, if you are not sure of your fleet’s cycling parameters you may want to consider an open-end TRAC lease so that you have more term flexibility because the lease terms are not fixed.
Which option will meet your needs for flexibility and value?
How much flexibility do you need for your terms and interest rates? Are fixed interest rates or term flexibility more important to you? And ultimately, which will provide you with the value you need to meet your fleet’s goals? If it’s term flexibility that you need, then the open-end floating rate TRAC lease may be the best choice, but if you are in search of a lease with a fixed interest rate, then the fixed-term TRAC or fixed FMV lease may be a better option.
Do you need wear and tear and mileage flexibility?
If you are looking for the flexibility of ownership that offers freedom from wear-and-tear penalties or mileage restrictions, then both the open-end floating rate TRAC lease and fixed-term TRAC lease are good options, as with these solutions the lessee assumes the residual risk rather than the lessor.
Are there multiple decision makers who play a role in your fleet financing?
Before you can begin making decisions about your fleet’s financing, it is important to take into consideration the needs and goals of all of the decision makers who will ultimately play a role in the leasing solution you choose. Decision makers from different areas of the business, such as procurement, finance, and HR, may have different priorities when it comes to fleet financing. As you start conversations about lease options, make sure you identify the needs and priorities of all of your fleet financing decision makers so that you can align your choice with your company’s objectives.
Does one leasing solution fit your entire fleet?
If yours is like most fleets, your fleet doesn’t just consist of one kind of vehicle. It’s likely that you have a range of vehicles from passenger cars to light- or heavy-duty trucks. And each of these vehicles are likely used for different applications! That said, there may not be a one-size-fits-all leasing solution for your entire fleet of vehicles, and you may need to fund your fleet using a combination of lease types.
It’s possible that you may not know the answers to all of these questions! Good news: Donlen offers a wide range of fleet leasing options, and our team of experts works directly with you to help you find the answers to these questions and any others you may have so you can choose the right solution to meet your fleet’s unique needs.