Moreover, opponents of leasing and loans argue, such a switch comes with a “hidden” cost; namely, interest charges must be paid for the privilege of paying for vehicles over time rather than up-front. There is no question interest charges included in lease payments increase vehicle acquisition costs. Far less clear, however, is that leasing increases a vehicle’s total lifecycle cost. If leasing allows an organization to replace vehicles in a timely manner that it otherwise would keep in service for too long, interest expenses incurred under a lease or loan financing program are likely more than offset by increases in vehicle residual values and reductions in vehicle maintenance and repair costs.
Given the shrinking and shrunken budgets with which many organizations are grappling due to the “Great Recession,” a willingness to shift from pay-before-you-go to pay-as-you-go financing may make the difference between maintaining an effective fleet replacement program based on the economic principles of optimal vehicle replacement discussed earlier and undermining such a program and its impact not only on direct vehicle capital and operating costs, but also on vehicle availability, reliability, and safety. The icing on the cake is, for many organizations, such a shift could produce a sizable budgetary windfall that makes the fleet operation part of the solution rather than a contributor to a big budget deficit.
Conclusion
No single approach is “best” to financing fleet replacement costs. Each approach discussed here offers advantages and disadvantages from a fiscal, economic, administrative, and political point of view. The relative importance of such factors varies from organization to organization, depending on the circumstances they currently face. Clearly, however, the fiscal challenges facing many organizations today and the threat they pose to fleet replacement spending in these organizations warrant consideration of new ways of doing business.
Fleet managers must understand the long-term threats posed by the “Great Recession” to their replacement programs and thus to the safety, reliability, and total cost of ownership of the vehicles and equipment they manage. Fleet replacement spending is an easy target for budget cutters, notwithstanding its importance to the operation of safe, economical, and reliable vehicles.
It is up to fleet managers to ensure decision makers understand the full consequences of measures assumed to reduce fleet costs and save money. Equally important, fleet managers should recognize the best time to experiment and innovate often occurs when traditional business practices – or spending habits – no longer seem tenable or affordable.
There may never be a better time than the present to explore the benefits of changing fleet replacement financing approaches. Predictable long-term funding requirements, the timely replacement of vehicles, lower total fleet ownership costs, and immediate budget savings – these are benefits even the most aggressive budget cutter should find hard to resist.
