November 2007, Business Fleet - Feature
Open vs Closed End Leasing: Which Is Right For You?
By Chris Brown
4. Know your business's cash-flow, budgeting and accounting needs
Companies on open-end leases that want a greater short-term cash flow can adjust their monthly reserve for depreciation. This flexibility can be a valuable accounting tool, though the fleet knows full well a balloon payment will come down the line if the reserve is set too low.
The open-end lease bill breaks down the monthly depreciation, management fee, interest and taxes. Monthly payment amounts vary, usually stepping down year-over-year as the asset is amortized. At end of term, the final accounting will show a loss or gain, reconditioning and transportation charges and a disposition fee.
The closed-end lease statement makes life easier on the accountant: All taxes and fees are bundled into one fixed monthly payment. Budgeting is simpler, as the fixed term determines the cost of the lease upfront. The car is returned to the lessor, and the lessee walks away, provided the mileage is within limits and there is no vehicle damage.
Some fleets budget for excess wear and tear, others do not. Smaller companies are more apt to reserve for wear and tear, where larger companies generally pay those losses as they occur. Leary estimates that a Motorlease client should be paying for damages on less than 10 percent of the fleet.
If the percentage runs higher, "We need to sit down and have a conversation on their expectation of usage," he says. When repairs are warranted, the leasing company should provide the client with the photos of the damage and the actual repair invoice if requested.
The client has the right to repair the vehicle, though the fleet management company can secure wholesale pricing and thus generally repair for cheaper, Leary says. However, on an open-end lease the lessee does not get away any easier, Singer says, as the damaged unit will simply return less at resale.
The Bottom Line
Unlike many retail transactions, the reputable fleet lessor is not in the business of steering you to one type of lease over the other, because both lease types are viable for most situations.
Yes, the lessor is looking to preserve his profit margin, but the driving force is to keep the client satisfied and thus preserve the business. "If you're going to nickel and dime a guy, it's going to be a short-term relationship," Singer says. "If you're fair and equitable, things have a way of working out. I'm doing everything within my power to add value to the relationship."
Fleet management companies are constantly analyzing the fleet to wring greater efficiency out of the present situation, Leary says. A little flexibility goes a long way. "If the sales guy covering Chicago moves to the suburbs, he'll be driving more. We'll write a new contract.
What good is it to hold the client's feet to the fire?" says Leary. "We're supposed to go to the client with this information, not the other way around." Ultimately, your fleet costs should come out equal with either lease. "Long term, a well-executed open-end lease and a well-executed closed-end lease are not going to differ greatly in total cost," Leary says. "However you shake this, the client is going to pay for the part of the vehicle's life that they consume."