If you are a business owner, you will know that with the expansion of your business, comes the need to add more assets to your operations. If you are running a fleet, no matter how big or small, this is most certainly the case.
The fact of the matter is that in order to remain competitive and continue growing, you will need to keep adding trucks and vehicles to your business. But, this naturally does come at a cost for your business.
Despite the global fleet industry’s value exceeding $15 billion in 2019, the industry, in general, is seeing a dip in profits. Not only are companies focussing more on operational efficiency, but the COVID-19 pandemic which has swept the globe has had huge effects on the fleet and trucking industry. In fact, the industry is seeing a 58% reduction in overall drive time, which will have a large impact on the global market.
With this in mind, the importance of growing your fleet, and your business cannot be undermined. So, we thought we would take a look at ways for you to add new trucks to your fleet, what the truck financing requirements are and how you can work out the best truck financing rates for your business.
Pre-Plan Your Fleet Strategy
The first thing you need to look at before going out and making a large purchase is your company’s financial standing, the growth trajectory, and the strategy for the next one to five years. Adding a truck, or several more trucks to your fleet can be a huge cost to your company, so you will need to weigh up the pros and cons before you simply jump in.
One of the first things to consider is the risk appetite of your company. Working together with your accountant is key at this point to establish the financial stability of the organization, as well as how much leeway you have in economic instability.
Consider, for a moment, the impact that COVID-19 had on businesses globally. It was a sudden, and unexpected downturn that wreaked havoc on an organization’s working capital. Companies found themselves in a position where their highly reduced working capital had to keep the company afloat for longer and had to carry more expenses than usual.
Next, consider your strategic trajectory and your company’s goals for the next 6 months, year, and five years. What are you aiming to achieve? Are you looking to branch out into other avenues of business? Or are you looking to expand your fleet to different parts of the country? This will give you an indication of what kind of vehicles, and how many you should be adding to your fleet over a period of time.
Lastly, consider the energy efficiency of the vehicles that you are choosing. Not only is there a general trend toward going green, but choosing the correct vehicle can also save you thousands in the long run. Not only can maintenance be cheaper on more efficient trucks, but you can end up spending less on fuel.
Consider Your Purchasing Options
The next thing to look at is what options you have when it comes to actually acquiring the truck. The first option that you have is to buy the truck outright with cash and be the sole owner of the vehicle. This naturally comes with its perks and benefits as you do own the vehicle and it can be cheaper than truck financing in the long run.
For small businesses and cash-strapped companies, however, this could be impossible. Trucks and equipment usually come with a big price tag, and in a lot of cases, a company just simply does not have the capital available for a massive cash purchase. Even in the case of larger organizations, a financial advisor will usually advise against a large cash purchase like this due to the risks involved.
As we mentioned earlier, COVID-19 was a prime example of how a company’s cash-flow can be impacted suddenly and devastatingly. Your working cash-flow will need to be set aside for day-to-day expenses like rent and staff wages.
So, what is the alternative you may ask? Leasing is one of the most popular and viable options for companies to acquire new trucks and equipment for their business, without the huge initial outlay of cash.
Truck financing comes with several benefits too, depending on the type of lease you opt for. There are generally two different types of leases; a capital lease and an operating lease. A capital lease is a contract that allows a company to pay monthly installments to the lessor for the use of equipment, with a residual amount attached at the end of the period. Once this has been paid, the lessee becomes the owner of the truck.
In an operating lease’s case, there is no residual, and the lessee never actually owns the truck. They can choose to re-lease it or give it back at the end of the period. In these cases, companies can easily upgrade their trucks and ensure that they have the most modern and top-of-the-range vehicles in their fleet as they can simply sign a new lease for a new truck.
Work Out The Benefits For Your Finances
Truck financing has varying impacts on your financial statements, cash-flow statements, and your taxes. It is important to know, especially if you are a start-up company just what each entails.
If you have bought the truck in cash, you will need to record it differently than if you have leased it. A cash purchase will be recorded as an asset on your financial statement and will be recorded as a debit and credit of the same amount.
However, because you own the vehicle, and because this will be producing an income for your company, you will also need to record the depreciation of the asset. Vehicles and trucks are usually given a five-year lifespan, so you can divide your purchasing price by five and list that as your depreciation amount.
Leases are recorded differently, especially in the case of an operating lease. Because you will not own the vehicle, it will not be conveyed on the balance sheet and will not be considered a company asset. Think of it similar to rent. Operating leases are considered expenses on the financial statements and are expensed on the income statement. This, in turn, impacts both the net income as well as the operating income of the business.
Operating leases are also considered tax-deductible as “ordinary and necessary” business expenses, and can be written off to tax. Because it is not considered a debt, and because you are not reporting the depreciation, your truck can be written off to debt. Speak to a knowledgeable tax consultant for further advice, as you can also write the interest off, thus not spending too much on your truck.
The last thing that you need to consider about acquiring a truck is how it will appear on your books to other creditors and investors. Usually, if you have signed an operating lease, or own the truck, it will appear on your balance sheets as an asset. This could discourage other creditors from giving you further lines of credit. Operating leases are also more welcomed by investors due to the fact that you have included integral equipment as an operating expense.
Take Other Costs Into Consideration
Whether you are leasing or buying outright, you will need to keep in mind the other costs that come with acquiring a new truck. Costs like insurance, maintenance, licensing, and transport and fuel need to be considered in the planning stages of the acquisition.
If you are purchasing the truck yourself and owning it, you will need to cover all of these costs yourself. When it comes to maintenance, there are a number of maintenance plans that you can sign up for to ensure that your truck receives regular serving and maintenance to extend its lifetime.
With leasing, this can be even easier. In the case of an operating lease, the lessor will be primarily responsible for the continued maintenance of the vehicle. Whether it is preventive maintenance or regular servicing, this will usually be included in the lease contract.
Capital leases might differ in this, so make sure you check your lease carefully. In some cases, the lessor might include a maintenance plan in the contract, while others might leave it up to you to do. They will only take responsibility for it, however, while they still own the rights to the equipment, so make sure you have a plan for the end of the lease and for when the equipment becomes yours.
Find the Right Financing Partner
When it comes to truck financing, having the right financing company is key for the smooth running of the leasing period. Lessors have very little risk when it comes to leasing equipment and vehicles to companies as they use it as collateral. So, if the lessee starts defaulting on their payments, the lessor can simply take back the truck.
The leasing process is also usually somewhat simple, and to-the-point. Credit checks are usually done, but are not critical, which is good news for a small business or start-up which has little to no credit history. Applications can take a few hours to a day or two to be approved, and the lessee can receive their new truck within a short period of time.
It is important, however, to make sure that you get the right company on your side if you are leasing. This company will be entering a financial contract with you and will need to be as transparent and accountable as possible to ensure that your money is being spent effectively.
It is highly advisable to find a financing partner who will treat you as a financial partner. Having a company whose staff has years of experience in the industry and who are experts in the field will be a huge advantage to you. If they are also keeping up with market trends and fluctuations, they will be able to advise you correctly and be able to guide you away from the pitfalls and risks of a lease.
Lastly, make sure you find a lessor who is flexible. There are a number of terms on the contract that can be altered to suit your unique needs. The duration of the contract, interest rates, the residual amount, and added costs and fees can all be negotiated and worked out. So, find the right company who will work with you, and you won’t look back on the lease.
Wrapping Up
When expanding your business, it is integral to consider all aspects of adding new equipment, vehicles, and cost-heavy expenses to your business. From the risks that come with the truck to your financial stability, to the financing partner, ensuring all elements are carefully mapped out will ensure your stability throughout the use of the truck. For a financing partner, you can trust, make sure you do your research, and only choose reputable and respected companies like Equipment Finance Canada for your financing needs.