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Before You Sign …

What All Operators Need to Know About Fleet and Equipmen


April 29, 2008
By Stacy Bradshaw


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Financing is a bit like healthcare these days – you have to take
ownership and control of your own financial wellbeing. When it comes to
purchasing equipment or vehicles for a vending operation, leasing is
often a healthy approach. It’s better than putting down a large sum of
cash and it sure beats going to the bank for another loan.

What All Operators Need to Know About Fleet and Equipment Leasing

Financing is a bit like healthcare these days – you have to take ownership and control of your own financial wellbeing. When it comes to purchasing equipment or vehicles for a vending operation, leasing is often a healthy approach. It’s better than putting down a large sum of cash and it sure beats going to the bank for another loan.

However, sorting through the leasing lingo and financial jargon can be tricky at best. Brushing up on the basics is vital. Preparing effective, well-informed questions before hitting the negotiation table will help operators avoid those monetary ailments caught too easily when trapped in the wrong type of lease.
Michael Bellmore of Applewood Leasing, a Canadian company specializing in fleet and equipment leasing, offered a few words of wisdom for vending, amusement, and OCS operators seeking out a lease or financing plan.

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With 10 years of experience in the OCS industry, coupled with 15 years in the auto field, Bellmore is fully equipped to answer the question: what should I know about fleet and equipment leasing before signing on the dotted line?

1. Weigh the pros and cons
10aFLEET: One reason fleet leasing is beneficial is because the payments are usually lower than purchase payments. On the other hand, when the lease is up, the lender gets the autos back, leaving the operator with no trade-in or sales assets.
According to Entrepreneur magazine, a general rule-of-thumb is: if a business requires four or more trucks, or if a new company fleet is needed every two or three years, leasing is recommended.

10bEQUIPMENT: Equipment leasing is a good choice for smaller operations because it frees up equity capital for investment in other areas. However, the overall cost of the equipment is much higher than an outright purchase.
For example, a $3,000 piece of equipment can end up costing $4,500 over the life of the lease. Bellmore said operators are better off getting a bank loan to pay off a piece of equipment that costs as little as $3,000.

2. Know the industry
10aMany vending and OCS operators are entering into both wholesale and retail leases, which disparages Bellmore. Retail leases have stipulations on mileage, wear and tear clauses, etc, and “that’s just not right for their industry.”
If operators are currently driving between 30,000 and 40,000 km a year, then they’ll want that much mileage on their lease; that means the business is doing well and with a wholesale lease, the vehicle will depreciate accordingly.

10bThe lifespan of certain vending equipment is relatively short. It’s a simple reality of the market, and one that should be factored in when considering equipment leasing. Bellmore recommends a shorter lease term on equipment:
“What happens in a lot of cases is that companies are still making payments on equipment that is not at the location drawing revenue because it’s outdated.”
If the term on the equipment lease is shortened, it’s going to pay for itself sooner, explained Bellmore. Operators tend to look for the lowest monthly payment, but it costs them more in the end.
Bellmore also recommended operators search for a lease provider that is aware of the vending industry, of its changes and how versatile it is. Otherwise, companies will most likely tell the operator just what they want to hear: high end-value and low monthly payments.

3. Have the house in order
10aEvaluating the current usage of the company fleet, taking into account mileage, purpose of use and maintenance costs, will help the operator know exactly what his/her expenses are. The lease provider can use this information to tailor the fleet program accordingly.

10bWhether leasing through an equipment distributor or an independent leasing company, financers look for many of the same proofs of commercial viability that a long-term loan provider would. Bellmore says having legitimate books is vital.
Applewood Leasing is selective about the type of vending equipment it finances. Bellmore is equally vigilant about which vending operations he is willing to lease the equipment to.
“If the company has been around for awhile and there’s been some large vending clients out there, they will have legitimate books, they will have financials and interim reports and so forth … those are the ones that I will focus on,” explained Bellmore.
The first question Bellmore asks an operator requesting an equipment lease is, “do you have current financials?” Otherwise, he’s not able to help them.

4. Ask the right questions
10aOperators must arm themselves with the right questions before they sign a vehicle lease contract. Is there an administration fee? Is there a mileage stipulation? Is there an excessive wear and tear clause? Is it a guarantee open-end lease or a closed-end lease? Does the fleet leaser allow third party buy-outs? Is there a penalty for early lease termination? Is there a disposal fee?
Disposal is designed to help the client unload the lease. A
disposal fee covers the cost of re-registering, licensing and finding a new buyer for the vehicle.
Some companies charge the cost of one lease payment, while some will charge a flat rate of up to $500 or $600 dollars. Others, like Applewood, help their larger clients dispose of their vehicle free of charge.

10bDisposal is easier with fleet leasing because wholesalers, who work to sell off used vehicles, are involved. With equipment, especially in markets like the OCS industry, operators are typically better off purchasing new machines and starting over again, said Bellmore.
“Part of the problem is, the coffee industry isn’t really set to refurbish old models … that’s what makes leasing in the coffee industry difficult; their interest rates are higher than in, say, construction.”
You’re always going to have a home for a $100,000 bulldozer, explained Bellmore. But used coffee machines tend to end up in the warehouse rafters.

5. Take a close look at the contract
10aAccording to Bellmore, a fleet leasing contract should indicate the make model, serial numbers, etc. If this fundamental information is not present, that should serve as red flag to the operator that the contract needs to be revisited.

10bOperators should always double check leasing contracts to ensure the serial numbers on the paperwork match the serial numbers on the equipment itself.
“I do recommend that for insurance purposes, they have an invoice of that piece of equipment,” added Bellmore.
   
6. Consider your options
10aLeasing starts to get confusing when you factor in the taxes. Taxation is the big difference between a lease and a finance contract.
Typically, a finance lease is an agreement in which the lessee is responsible for maintenance, taxes, and insurance, according to the Canadian Finance and Leasing Association.
However, lease payments, while subject to Canada Revenue Agency guidelines, are typically fully tax-deductible.

10bThe providers of terms loans to finance equipment include banks, insurance companies, and independent finance companies, according to Canada Business, a cooperative of 43 Canadian federal business departments. On occasion, the equipment vendors themselves will also act as a lease provider.

Can-West Vending Distributors Ltd., for example, offers different lease and financing options on both new and used equipment.

“The most popular is our in-house (through Crane National Vendors) finance program,” said Darren Nickle, general manager at Can-West. The in-house program allows their customers to finance Crane equipment purchases at competitive bank rates.

Can-West also offers lease-to-own programs that are arranged through independent lease providers. Many equipment suppliers in Canada offer similar programs in cooperation with finance companies. The onus is on the operator to ask the supplier if they have access to any such programs.

Leasing is becoming increasingly important in the vending industry. Doug Cane of Caneta Research Inc. reported last year that of the approximate 200,000 cold beverage machines in Canada, a good majority will reach their expected life span within the next 5-10 years.

According to Bellmore, “there’s a number of vendors out there that need to step up right now,” and start delivering their product in properly refrigerated trucks and suitable equipment.

Because leasing helps facilitate the acquisition of productive assets like trucks and equipment, it generally makes good business sense. But operators should always approach such agreements with a sufficient grasp of the fundamentals and a healthy dose of caution and self-preservation.o