Purchase or Lease Your Vehicles?
June 18, 2007
Keeping business expenses to manageable levels can be very trying, for financial and time-saving reasons. That’s why HVAC contractors try and find the most cost-effective and time-efficient operations to streamline their businesses and increase bottom-line profitability.
One area that consumes a lot of time and money is vehicle acquisition and maintenance. The choice is between purchasing or leasing a vehicle (or fleet) and having a regular maintenance program with individuals responsible for running the program. Contractors regularly purchase new or used vehicles, or lease vehicles with varying contract lengths.
While some contractors may choose to administer a regular vehicle maintenance program, others base their maintenance decisions on rule of thumb statistics, using manufacturers’ suggested service schedules.
The NEWS wanted to find out what choices HVAC contractors make when it comes to purchasing or leasing vehicles and why they make these choices. A total of 92 respondents told us their preferences in a recent online survey at www.achrnews.com.
Most respondents, like Richard Krohn of Krohn Refrigeration Inc., Manalapan, N.J., said they purchase their vehicles. Krohn said, “I will always buy. I hate borrowing or renting someone else’s property (which is what a lease is in my opinion). The complaining and moaning alone from the excessive miles and little dents, and the extra costs charged, are enough to keep me away from leasing.
“Want a real headache? Go and crash or total a leased vehicle and see the crap hit the fan. When my accountant says I’ve got to spend money before the end of the year, a new truck is an easy way to do it.”
A smaller number of HVAC contractors said they’d prefer to lease their vehicles. Ken Bodwell of Innovative Service Solutions, Orlando, Fla., noted that his company leases its vehicles. “I think the main advantage is that our fleet looks new all the time,” he said. “We are able to control repair and maintenance costs and in general use our fleet as an advertising tool creating name recognition.
“It is a direct expense and off the balance sheet and it forces us to keep our fleet current and clean.”
PURCHASE VS. LEASEFigure 1 shows that 76 percent of the respondents (70) said they purchase; 24 percent (22) said they lease. Some of the respondents gave their reasons for purchasing.
Jeff Nimmo of Dual Temp Mechanical, Livonia, Mich., said, “We used to lease all of our vehicles, but the monthly cost just got out of hand. We have found that we do not pay out as much in maintenance on our owned vehicles to warrant revolving short-term leases.”
“Purchasing vehicles builds cor-porate net worth,” said Aaron York Sr. of Aaron York’s Quality A/C, Indianapolis. “We find that by maintaining them well, we can get over 100,000 miles from a vehicle. We will average less than 1,000 miles per month, thus will keep a vehicle 10 years or more.”
For Ken Secor of Palmer Heating LLC, Clark, N.J., cash flow is the reason he chooses to buy his vehicles. “Purchasing is always cheaper if you have adequate operating capital or have abnormally tight cash flow at the time the vehicle(s) are needed,” he said.
Some contractors, like Alex Walter, Alex Walter Furnaces, A/C and More, Aurora, Colo., prefer to purchase used vehicles, helping out the cash flow even more. “I purchase used vehicles to avoid the early years’ depreciation,” he said. “Our business is very cyclical and so is the cash flow, so having owned vehicles with no or very low monthly payments is very nice when the economy is down.”
Having a fleet of used, purchased vehicles is also the choice of John Richardson of Richardson’s Heating & Air Conditioning, Chapin, S.C. “I buy used E150 vans and F150 Ford pickups that are in good condition but at reasonable prices,” he said. “This way someone else has taken the hit for the cost of brand-new vehicles rather than us. Our cost basis is lower, so we know we are going to spend some money on repairs.
“Over the years, we have upgraded the age and condition of the vehicles we buy to the point that when we buy one, we expect it to last us about five years or so,” he said. “Then we will sell it for a few dollars and get another. I do, however, normally take out three-year loans on the vehicles so they are paid for in three years or less even though the depreciation period is five years. This has put us in a very good debt situation. We owe very little money on anything.”
Leasing is a no-brainer for contractor Matt Prazenka of American Weathermakers, Northbrook, Ill. “Our leasing company finds the best purchase price,” he said. “We take advantage of associations and manufacturers, which allow us to choose the best program.
“The leasing company provides disposal of retired vehicles and their resale prices have been very good recently,” he said. “They process the outfitting, maintain my specs, and review and recommend vehicle needs and new products. They do the work for me.”
Craig Jones of Slasor Heating & Cooling, Livonia, Mich., said a new type of equity leasing program is what got his company hooked on leasing vehicles. “With an equity lease, you can update, dispose of, add, downsize, etc., and not lose any equity in the vehicles,” he said. “With a company like Enterprise Fleet Leasing you get the advantage of their expertise and knowledge of all available fleet incentives, retail incentives, and bin package promotions.
“Most of all, they handle the disposal of our existing vehicles by wholesaling them,” Jones said. “They get a very fair market value for the used vehicles and apply the equity to the new leases if you wish. They also transport the vehicles to the location where the bin packages are installed and then where the lettering is done. This makes for a smooth transition.”
Other respondents said they both purchase and lease. Mike Beaver of Beaver Brothers, Salisbury, N.C., said, “We have done both. It is better to purchase when interest rates are low or the motor company has special pricing, like little or no interest loans.”
VEHICLE USAGE VARIESSome contractors would prefer to squeeze every ounce of life out of each vehicle. Others set strict guidelines for how many miles they will keep a vehicle on the road. The choice is often made based on the condition of the vehicle if purchased, or mileage limitations on a lease agreement.
In either case, having a regular, planned maintenance program directly impacts both the life and the cost of each vehicle. Respondents to the question of whether they have a regular maintenance plan were divided between those who said they do have a plan (77 percent) and those who do not (23 percent). (See Figure 2)
Fifty-two of the total respondents listed their costs for vehicle maintenance and repair. The average from the respondents was $1,023 per vehicle. Some contractors chose to include the cost of gas for each vehicle, which explained variations in costs from $200 to $10,000.
Michael Curtis of Arctic Air Inc., Palatka, Fla., has a routine for his fleet of purchased vehicles. “Our annual cost is $720 per vehicle,” he said. “During scheduled maintenance we identify any problems and schedule the truck to come back in for any repairs that can be scheduled at a later day.”
Greg McAfee of McAfee Heating & Air Conditioning, Kettering, Ohio, said his costs are about the same, too, for his fleet of purchased vehicles. “We have a fleet service company that takes care of all service and repairs,” he said. “The average is $750, including oil/lube but not including large repairs.”
Contractor Al Corelli purchases vehicles for Mike Fisher Plumbing & Heating, Larchmont, N.Y. His company maintains a regular fleet maintenance program. “Each vehicle is dealer serviced for the first 10,000 miles,” he said. “Then it goes into our maintenance software. The average maintenance cost per vehicle is $785 without fuel.”
One contractor who leases his vehicles, James Dieter of Dieter Brothers Heating, Cooling & Security, Bethlehem, Pa., said his lease plan covers vehicle service. “All repairs and maintenance are included with the lease. That works out to around $100 per month per vehicle,” he said.
Many respondents who purchase their vehicles said the cost of maintenance is directly related to the age of the vehicle, with costs going higher as the fleet gets older. Some contractors are seeing hefty maintenance costs because they hold on to their vehicles for a long time. In fact, the average number of miles per vehicle based on survey respondents was slightly over 140,000 miles. (Answers ranged from 80,000 to 400,000 miles.)
The average length of time contractors kept their vehicles was 6.75 years. (Answers ranged from three to 15 years.)
John McCarthy Sr., of McCar-thy’s One Hour Heating & Air Conditioning, Omaha, Neb., said his fleet of purchased vehicles is a little higher than the survey average. “I have some install units that are as old as 1988 models,” he said. “We run service trucks up to 150,000 miles.”
Dave Mitlyng of Mitlyng Electric & Refrigeration, Montevideo, Minn., said his experience varies based on which vehicle he purchases. “I used to have three-quarter-ton cargo vans (gas) and would replace them every five years,” he said. “I would get 125,000 miles on them.
“In 2000, I went to one-ton diesel trucks because I thought I would get better mileage and longer life,” he said. “The one-ton truck has 149,000 miles but maintenance has been very high this year. I’m going back to three-quarter-ton cargo vans.
“I think a company is better off replacing vehicles every four years,” he added. “The vehicles are shot by then and worth nothing anyway. I thought the one-tons were going to be worth $7,000-$10,000, but when I talked to my dealer he said the truck was only worth $2,000.”
Benson Green of Benson’s Heating & Air Conditioning, Tallahassee, Fla., said he keeps his purchased vehicles for varying lengths of time depending on who is using them. “We keep them sometimes as long as 10 years after painting them once and doing a major rebuild,” he said. “Service gets the new vehicles and after three years they go to construction. Box trucks are in changeout every six years.”
The survey also asked respondents if they have a dedicated mechanic who oversees vehicle maintenance, or if the techs and installers are responsible for maintenance. Figure 3 shows that 61 percent of respondents said they have a regular mechanic; 39 percent rely on their techs or installers to service their own vehicles.
THE BOTTOM LINEPerhaps the one X factor that hasn’t been discussed (outside of the financial/time considerations) is the level of control that purchasing or leasing gives a contractor. Some contractors choose to oversee everything. Others would rather delegate.
Art Grace has found a way to take control of his fleet. The owner of Krutsch Mechanical Services, Taylor, Mich., said, “The problem with leasing is control of the cash flow in the slow months. If you pay cash for all your vehicles, even older or higher-mileage vehicles, you can control when the money is spent.
“We have actually created our own leasing company for the purchase of new vehicles and have successfully been able to manage the cash flow internally and reap the benefit of leasing as well.”
Scott Robinson of Apple Heating & Cooling, Ashtabula, Ohio, has tried both leasing and purchasing. “Overall I would say leasing is just a fancy way to purchase,” he said. “My guess is, the only way leasing would be better for us would be if we somehow got a favorable interest rate built into the lease.
“Some companies prefer to have the liability of the unpaid-for vehicle off the balance sheet. This means if you purchase and it is not paid for, you show an amount due on the loan on your balance sheet. If you lease, you don’t. It could appear you are financially stronger with less liability. In reality, you are buying the vehicle at the end of the lease anyway, and accepted rules of accounting require you to disclose the details of the lease, so potential lenders can get a true picture of your financial strength. I don’ t see any real advantage to leasing.
“But I guess for some companies, reducing the monthly payment provides current cash. I think this just delays the day of reckoning.”
Dennis Morgan of Modern Aire, Inc., Havre, Mont., was straight to the point. “I need the depreciation and I guess I just like to own my vehicles.”
FEEDBACK WELCOMEDIf you would like to participate in this month’s two online surveys, visit www.achrnews.com and click on “Surveys” in the upper left corner. Current surveys are “Contractors: Where and what do you look for in new hires?” and “Is your Website worth the time and money you spend on it? Want to win a free Website consultation?”
Publication Date: 06/18/2007