Your vehicles are the backbone of your business. You need them to make money, but first you need the money to acquire them. Those funds are hard to come by when your cash is required for other parts of your business. To avoid a big down payment and hefty monthly payments that tie up your capital, an open- or closed-end lease is an ideal way to build your fleet. But you need to make sure you get the lease type, terms, rates and conditions that tightly align with your specific business goals and circumstances.
Consider these important factors first
To figure out the right leases for your fleet, start by determining these parameters for your business:
- Your tolerance for risk. Can you wait until your vehicles are remarketed to know your total cost of ownership? The rate of your vehicle’s depreciation and the future health of the used vehicle market could go in your favor or against you – can you afford to take that chance? Or do you need predictable outcomes?
- Your financial situation. Do you need to stay within a strict budget that requires regular fixed costs? Or do you have some wiggle room?
- Your fleet usage. Do your vehicles get banged up on the job? Or is their wear and tear typical? Do your vehicles rack up a lot of miles quickly? Does their mileage vary? Or is their mileage average?
- Your vehicle customizations. Do you want to keep your vehicles longer because you plan to upfit them with special equipment for the job?
- Your fleet’s changeability. Do you need the flexibility to swap out vehicle types to meet varying job requirements? Do you need to frequently adjust the number of your vehicles due to seasonal needs? Or is your fleet makeup pretty consistent?
The key differences between open- and closed-end leases
Both lease types are viable for most situations. The goal is to figure out which one is best at fitting within your business parameters and minimizing your total cost of ownership. Before you can do that, you need to understand the basics of both leases.
What is an open-end lease?
An open-end lease is when you take on the vehicle’s depreciation risk. Your total cost of ownership isn’t known until the vehicle is remarketed.
The structure of an open-end lease includes a minimum term, typically 12 months. You can terminate the lease at any point after the term ends. When you do, you turn in the vehicle for resale and get the gain if the market value exceeds the residual value, or pay the difference if the market value is less.
To better fit your finance preferences, some companies, including Mike Albert Fleet Solutions, offer a choice of rates on open-end leases:
Open-end fixed rates:
- Your total monthly payment remains the same from the time your vehicle is delivered to the end of your lease, making it easier to stay within a fixed budget.
- Your fixed interest rate is indexed to the Business Day Rate of various financial indices and is established at the beginning of your lease.
- Your fixed interest rate remains unchanged throughout your lease.
Open-end floating rates:
- When interest rates are high, but are predicted to fall over the duration of your lease term, a floating rate may be a better bet, as long as your business isn’t risk aversive.
- Your floating rate is indexed to the Business Day Rate of a specific financial index.
- The interest portion of your payment adjusts monthly according to index fluctuations.
Open-end leases may be right for your business if:
- You have remarketing expertise and want to try to resell your vehicles for a profit.
- Your vehicles have been specially upfitted for on-the-job tasks.
- Your fleet has frequently changing needs.
- Your vehicles are subjected to rough usage.
What is a closed-end lease?
A closed-end lease is when the leasing company assumes the vehicle’s depreciation risk and responsibility for remarketing.
The structure of a closed-end lease has a set length, usually ranging from 12 months to 48 months, and comes with a fixed monthly payment and an annual mileage allotment. At the end of the lease you can simply return the vehicle and walk away, unless you owe fees for excess mileage or damage. You can also choose to extend the lease. Or, if you decide to take ownership of the vehicle, you can buy it at the residual value predetermined at the beginning of the lease.
There’s a common misperception that closed-end leases don’t offer flexibility in terms of mileage. But some lessors provide special options that account for high or varied mileage. Mike Albert offers two of these options:
Mileage credit program:
- Perfect if your fleet has unpredictable mileage patterns.
- A higher mileage is defined in the lease terms to safeguard against overage fees.
- A credit is paid at the end of the lease for each contracted mile not driven, ensuring you only pay for the miles you use.
Unlimited mileage program:
- Ideal if your vehicles accumulate a lot of miles or if the mileage of the different vehicles within your fleet is all over the board and you want a fixed cost across the entire fleet.
- The costs are completely fixed regardless of the miles driven, ensuring budget predictability and eliminating surprise fees at the end of the lease
Closed-end leases may be right for your business if:
- You need to know your total cost of ownership upfront.
- You need fixed monthly payments to meet a tight budget.
- You don’t want the risk and worry that comes with vehicle depreciation and remarketing, such as market price volatility, rate fluctuations and seasonal resale influences.
Find the best partner to provide the best fit
Once you know your business parameters and the fundamentals of leasing, it’s time to partner with the right fleet leasing company. A lessor acting in your best interest won’t try to push a certain lease type on you. Instead, they’ll want to get a deep understanding of your specific operations and goals in order to customize a leasing strategy that works the hardest for your business and minimizes your total cost of ownership. They may even recommend a combination of lease types if you have varying vehicle needs and situations.
Mike Albert gives you more flexibility to preserve more of your capital
Mike Albert is a privately owned company, which gives us the freedom to offer you more flexible leasing and funding options, terms, rates and conditions. We don’t have a specific leasing agenda. Our goal is to maximize your cash flow and minimize your costs by working closely with you to tailor a financial plan that ensures you pay only for the portion of the vehicle you use. No more.
Matched depreciation: pay only for what you use
Most vehicle leases are configured to depreciate quickly in a straight line down to $0. But vehicles still have value at the end of their leases. That’s why Mike Albert matches your vehicle’s depreciation to the remaining book value at the end of the lease, saving you from overpayment. In fact, with matched depreciation, many of our clients have saved up to $150 a month per vehicle.
Purchase leaseback: another option for freeing up your cash.
At Mike Albert, you can sell your aging fleet vehicles to us at market value and lease them back with efficient financing. Why? So you can:
- Unlock the cash tied up in your fleet and invest it in other parts of your business.
- Pass the residual risk of vehicle ownership to Mike Albert.
- Remove depreciating assets from your balance sheet and improve the financial health of your business.
To find out more about the best leasing and funding strategy for your fleet vehicles, learn about our leasing and financing program.
Did you enjoy this class?
Share it with your organization and colleagues.