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Perspective: Striking the Right Buy-Lease Balance
Most Transportation Companies Need Both
Key Takeaways:
- In a turbulent economy, Lairsen urges transportation companies to finance truck fleets with a mix of buying and leasing rather than defaulting to one approach.
- A balanced strategy matters because it diversifies capital use, control and residual risk while stabilizing costs, cash flow and balance sheet exposure, he says.
- Lairsen advises companies to set owned-to-leased ratios by growth stage, freight, mileage and maintenance capabilities and consider ownership costs as trucks age.
What’s the smartest strategy for financing truck fleets in a turbulent economy — buy or lease? For many transportation companies, the answer is “both.” Yet businesses tend to favor one option over the other by default, without understanding the value of a balanced strategy.
Just as it makes business sense to diversify a company’s financial investments, their investments in trucks and trailers also should be diversified. Businesses can enjoy the benefits of each financing option and mitigate risks by incorporating both owned and leased assets. However, determining the right ratio of leased versus owned assets can vary by company.
Understand Options
The first step in optimizing asset financing is to understand the benefits and risks of each strategy.
Buying: Owning equipment gives companies greater control over interest rates, financing sources and vehicle specifications. They can later sell the equipment for some return on investment. On the other hand, ownership often requires down payments that divert cash from revenue-generating activities. It impacts balance sheets because associated debt affects financials considered by lenders and investors. The transportation company also assumes the full risk of disposing of the asset. This encourages companies to hold on to equipment for far longer than they should, increasing operating costs as assets age.
Leasing: The leasing company assumes full residual risks in leasing agreements. This helps transportation businesses maintain a predictable cost structure and shorter trade cycles — ideally, three years — so that they are running equipment in its best-performing years when it is most cost-efficient. Leasing requires minimal upfront capital, and payments are generally treated as off-balance-sheet operating expenses. On the other hand, transportation companies have less control over vehicle specifications depending on the lease structure, and there may be mileage or usage restrictions. The financing company also owns the equipment at the end of the term.
Determine Strategies
The ideal ratio of leased versus owned assets for each business varies depending on a company’s growth stage, the freight being hauled and market conditions. Sometimes a 50-50 balance between owned and leased assets makes sense, and other times a company should lean more heavily on leasing or buying.
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Strike a balance: Midsize companies that are not large enough to absorb residual risks should hedge their bets evenly across both strategies. This is also a good strategy for: businesses in moderately cyclical markets with some freight volatility but a stable base of customers; those building maintenance and remarketing capabilities; diversified operations with both high-mileage over-the-road applications and lower-mileage regional or dedicated routes; companies prioritizing strategic balance; and those that value flexibility in navigating market changes.
Lean into leasing: High-growth or scaling operations that need to conserve capital for other uses should lease more assets than they own. This is also a good strategy for: companies in volatile or cyclical freight markets; those with limited maintenance capabilities; financially leveraged businesses; new or smaller fleets that cannot negotiate strong residual positions on owned equipment; businesses concerned about uncertain interest rates, used truck values or freight rates; and high-mileage operations running team drivers, hybrid schedules or slip-seat configurations that add miles quickly.
Lean into buying: Established, financially stable operations with healthy cash reserves and access to favorable financing terms should own most of their assets while leasing others to ensure operational flexibility. This is also a good strategy for: firms with low-mileage or regional applications that log relatively few miles; those with robust in-house maintenance capabilities and remarketing expertise; and businesses requiring highly customized equipment, such as vocational builds, specific powertrain configurations or specialized bodies.
Consider Total Costs
Lastly, consider the total cost of ownership. That means looking beyond the monthly payment, as fuel, maintenance and downtime expenses begin to rise significantly by the fourth and fifth year in the life of a commercial truck.
, vice president of fleet leasing for , can be reached at blairsen@tel360.com.
