Scaling is a crucial and essential step undertaken by high-growth businesses. To ensure your company avoids potential “trip hazards” due to vehicle shortages, an organization needs comprehensive planning, enough capital, and foresight to determine where a company will stand relative to acquiring the vehicles it needs to generate success.

Fleet Planning is an essential and significant element, particularly when scaling a business. The acquisition of a fleet of vehicles requires enough capital resources to finance the purchase cost of these assets. A fleet manager is typically responsible for acquiring vehicles, and they must consider its impact on the financial situation of an entity.

Does your business need access to a fleet of vehicles? If you are worried and it is difficult to choose whether to go for a financing arrangement OR use the company’s cash flows for buying vehicles for your company, then we are here to answer your queries.

Procurement of Commercial Fleet

Businesses have the following options for acquiring vehicles:

• Purchasing vehicles from the retailers and paying with cash and/or bank debt, OR
• Working with a fleet management company that utilizes a lease financing structure to acquire vehicles at wholesale prices. (Which sounds better to you?)
• Caution–not all leasing companies pass thru savings from their wholesale buying power to their customers.

Purchasing vehicles with cash can steal the capital your business needs for expansion.   Planning your capital needs for acquiring vehicles, timing, and how the use of vehicles will generate revenue for your business are essential things to understand, so being fully briefed about the different financing sources and lease structure is crucial in making the best decision for your business.

Before making a final decision, keep these things in mind:

• Flexibility

An operating lease structure can be a favorable option because 100% of the vehicle cost can be classified as a business expense, which could lower Net Operating Income, and thus, Income Tax liability.  This structure is beneficial because it enables companies to focus their cash on growing the business (and profits) while avoiding the need to tie up the cash for acquiring despicable assets.

If a company has tight cash flows and prevailing market conditions are uncertain, acquiring vehicles via lease or rentals is a good option. It helps towards:

• Better utilization of cash,
• Obtaining potential tax benefits, &
• Utilization of cash flows on projects whose return is higher

Businesses benefit by having the flexibility to utilize their cash for revenue-generating activities.  Conversely,  “investing” capital into depreciating assets, generates 0% ROI, which is unlikely to be compelling for your investors/owners.

• Failing to plan for disruptions can negatively impact our brand

The current supply-chain and microchip shortages are severely constraining vehicle manufacturers’ ability to meet demand. Further, the order-to-delivery cycle is averaging between 6 - 9 months which hinders the ability to predict when the vehicles your business requires will be available.  Timing is a crucial risk for any scaling business, mainly due to supply chain shortage problems. Businesses that value their brand promise of reliable meeting customer needs will damage goodwill and brand image if they fail to plan for these market disruptions.

• The borrowing capacity of a business

Typically a scaling business will borrow money to scale, so bank financing to fund vehicle purchases can be tricky. Scaling businesses are loath to borrow for vehicles because such activity could breach loan covenants with their key lenders and/or diminish the borrowing capacity for other needs. Operating leases can allay these concerns vs bank financing for the purchase of a fleet of vehicles.

Putting It All Together

This blog post aims to make business leaders aware of considerations they can leverage in scaling their business.  Fleet vehicle leasing can make positive impacts in areas such as mitigating income tax exposure, freeing-up cash flow for profit-making activities (ROI), and borrowing money without diminishing overall borrowing capacity.  

Finance experts with relevant experience in the vehicle industry (such as Alliance Leasing) can be hired as “fractional” fleet managers for your business who can assist you in evaluating all of your options and then execute on the ones you deem feasible.

If your business requires several vehicles over time, hire a fleet management company rather than purchasing from retailers because they can enable you to acquire the same assets at a wholesale price.

Don’t hesitate to contact us to discuss your needs (and possible risk exposures) in further detail.

EXCLUSIVELY FOR PAUL DAVIS BUSINESS OWNERS:

Check out this offer to help prioritize how you can spend fleet dollars to gain the most benefit.  Click Here