Leasing vs. Buying: What Makes Sense For Your Business?
Authored by: Shaefer Schuetz
Why would anyone want to rent anything? Equity is sexy. Something feels good about saying, “Yeah, that’s mine. I own that.”
The reality is that in many cases, buying commercial vehicles makes sense. However, in some cases, renting or leasing business vehicles makes more sense.
The fun part is getting to decide which works best for your organization.
In many instances, financial executives handle the numbers, without consulting anyone else in the organization. Wouldn’t it feel good to take your seat at the table and offer some valuable input to the CFO yourself about truck leasing and van rental options?
The first step in figuring out if leasing or buying makes more sense for your business is to educate yourself. Let’s walk through the financial benefits of leasing compared to buying so you can be an impactful part of the business conversation.
Financial considerations of leasing vs. buying
Time value of money
The underlying foundation for every financial institution in the world is a concept that is foreign to many: Time value of money. The principles of this idea can be found in essentially every financial function imaginable. Time value of money is the idea that money today is worth more than an identical sum of money at any future date. The reason for this is earning potential. Because of interest, inflation, potential growth rates, capital gains, etc., $1 today is worth more than $1 tomorrow.
Your money should work for you. Financers know this—and this is why money in your pocket today is as valuable as it will ever be.
When you exclusively purchase the vehicles in your commercial fleet, you tie up a lot of money in an asset that you know will depreciate extensively.
Wouldn’t you want to allocate your cash in a way that generates revenue? Cash allocation for revenue generation should be the main focus for any business operating with a profit margin in mind.
So why would anyone want to throw loads of cash into a depreciating money pit like commercial vehicles? This exact question is why City Rent A Truck exists.
Return on assets
When an organization purchases its own vehicles, equipment is charted in the asset column. This is an asset that will not directly pull its own weight. Because these vehicles are not
income-producing assets, your return on assets (ROA) will fall.
With truck leasing, you won’t have to worry about an incredibly high purchase price with no direct income dragging down your ROA.
Debt to equity
Companies also need to consider their debt to equity (D/E) ratio as well. D/E is a business’s total liabilities divided by shareholder equity and is used to evaluate a company’s financial leverage.
Often, a balance is necessary between the two. Too much of either one could be viewed as ignorance or recklessness. This idea must be considered when deciding how to finance your fleet.
The unusually low interest rates since 2008 have given businesses an extra incentive to take on debt. Not only has the Trump administration been consistently pressuring the fed to cut rates, but we have an emergency rate cut for the first time since 2008.
If you finance your entire fleet through debt, you may want to consider ditching the interest payments (as low as they may be) and opening up some of that, now cheaper, credit allowance for assets that will either produce income or appreciate in value—not ones that depreciate throughout their lifetime like when you buy commercial vehicles.
Potential Economic Downturn
As the economy appears to be marching toward an inevitable correction, cash will become even more valuable than it has been in recent years.
Leasing becomes a far more viable option. Keep your cash close to your chest. Let us worry about financing the depreciating assets.
The Bottom Line
Publicly held companies are often reminded of all these financial ratios and factors by current and potential investors. Unfortunately, many privately held companies are not generally concerned with them.
Well, I can assure you the way in which you leverage your business will be analyzed and contemplated, by any creditor considering a business relationship. This will be the case whether you are public or private.
The age-old question of, “Should I buy or rent?” is alive and well. With an answer fit for some guy that works at a truck rental company: rent. Always rent. For the love of God, just rent.