Deciding on the Right Lease Option for Your Company
There are significant differences between open-end and closed-end operating lease options, and it can often be confusing for fleet managers when they need to decide which type of lease will work best for their organizations. While many companies may have fleet leasing arrangements in place, it’s always a best practice to understand all the options that are available and revisit the terms of an arrangement to ensure that it’s the best option for their company. Let’s talk a little about some of the differences and how to determine which might be the best option for your fleet requirements, even if you currently have a lease agreement in place.
In a closed-end lease, the terms of the lease are fixed, based on the agreed-upon mileage and condition of the vehicles determined by the lessee’s (the company that is leasing the vehicles) usage. The risk of ownership remains with the lessor (the leasing company). If the vehicles’ actual use is different from the lease terms, oftentimes there are adjustments made at the end of the lease, because the vehicles’ residual value is based upon the assumptions of the vehicles’ overall mileage and condition. Oftentimes, this type of lease can provide improved cash flow for the lessee.
Here are some questions to consider when thinking about whether a closed-end lease is for you:
- Do you like the idea of an accurate/fixed budget?
- Do you like to change vehicles every two to four years?
- Is your mileage fairly predictable?
- Would you rather not deal with the residual risk of this asset at the end of the lease?
- Do you want to stay out of the used vehicle market?
If your answer is yes to any of the above questions, closed-end may be the right choice for your fleet. When you need to know exactly what your company will owe on a lease from beginning to end, the closed-end lease is probably the best solution. And if the used car market is poor, you don’t need to worry about it.
In an open-end lease, a significant degree of ownership risk is held by the lessee. Basically, the total costs of the lease costs aren’t known until the end of the lease and the vehicles are sold. If there are any gains or losses on the sale of the vehicles, it is applied to the lessee’s account. Under an open-end lease, there are significant risks that the lessee may be exposed to in the used vehicle market that are related to the mileage and condition of vehicles. However, an open-end lease gives a company the ability to benefit when the used-car market is on the upswing.
Here are some questions to consider when thinking about whether an open-end lease is for you:
- Have you always owned vehicles and you are more comfortable with this finance style of arrangement?
- Do you like the idea of having term flexibility?
- Does your fleet usage dictate high mileage usage?
- Do you believe that less positive cash flow during the active life of the asset is an OK trade-off to ensure breakeven or positive possible cash flow at termination?
If your answer is yes to any of the above questions, open-end leasing may be the right choice for your fleet. Many companies like the idea of being in the automobile/truck business, and like the idea of making all the decisions.
TRAC (Terminal Rental Adjustment Clause) leasing is a modified open-end lease that allows you the same flexibility of the traditional open-end lease but without needing to depreciate the vehicle down to zero over a specified period of time.
The New Capital “Equity Lease”
Capital has just announced a new lease structure that takes the upside of all the above lease alternatives and limits the downside of each. To learn more, please scan this QR code or click on the image:
Through a unique combination of caring, communication, and collaboration, CLG offers transportation and fleet management solutions that incorporate the benefits of ownership and the benefits of leasing.
Capital Lease Group is a leading fleet leasing provider in Massachusetts and beyond. We are committed to structuring a lease that will be designed to fit your business rather than having your business conform to the confines of a standard lease. We will invest the time to understand each customer’s individual needs while offering a full range of leasing services and products that will complement each customer’s goals. Our experienced staff of knowledgeable experts in sales, administration, and service will help you feel comfortable so that your main focus will be on your company’s vision while we handle all of your fleet requirements.
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