The fight not only pits new ways against old, it also reveals modern-day ruptures in the labor market.
It’s been a long, difficult path back to where the vehicle leasing and purchasing market stands today for the chauffeured transportation industry. Since the economy tanked in 2008, operators have been running their fleets longer and harder than ever. Now that the economy is turning around and stabilizing, the cash flow has loosened a bit and provides operators with opportunities to freshen up their vehicles.
During the tough times, the strong operators reduced their fleets to a more manageable size, while weaker operators went out of business, says Don Coolbaugh, vice president of sales of Advantage Funding. So did manufacturers and dealers. “Everybody pretty much ran their equipment for as long as they could,” he says. “There were no new equipment purchases and everyone was going for used equipment.”
But this industry has one of the quickest turnover rates for vehicles. Since the fleet is actually the essence of the company, it’s important that they be as pristine and comfortable as possible for clients. “There is only so long [operators] can sit on their hands. Now you have all this equipment with up to 400,000 miles on it, and they need to replace them,” Coolbaugh says.
As the banks have loosened their lending practices, vehicles are starting to move again towards chauffeured transportation. Interest rates are hitting all-time lows for commercial operators, says Bill Cunningham, general sales manager of Acton Fleet Sales/SoCal Penske Professional Vehicles. “The rates right now are phenomenal. People with good credit can borrow money in the threes.”
Credit is available for people if they qualify, says Jared Zimlin, business development director of Priority One Financial Services. “The only hangover, if you will, from the recession is that if you had a company that had trouble in the past and they’re trying to get back on their feet again, they are having a tougher time,” he says. “They’re looked at like startups again, so there is still that barrier for that kind of customer.”
Types of Vehicles
As operators move to replenish fleets with new vehicles, they’re finding that the landscape of available transportation vehicles has shifted from pre-recession days. Priority One Financial is making its foray into the chauffeured transportation industry from a background in financing RVs, boats, and trailers for commercial use. “We seem to be getting more shuttle buses and Sprinter vans,” says Zimlin, who noted that their typical client operates a smaller fleet with one or two vehicles.
“Equipment changes have been a drastic change,” Coolbaugh adds. “It really is interesting to see what type of vehicle operators are going to purchase as we move into this expansion phase. Will it be the MKT or will a new manufacturer take the lead?” With the retirement of the Lincoln Town Car sedan, companies such as Toyota, BMW, and Mercedes-Benz have released models that are vying for market share.
The market is calling for more SUV-type vehicles, along with the rise of corporate transportation vehicles such as Sprinter vans and motorcoaches. Yet industry standards are still doing well, not just in vehicle quality but in available financing as well.
“I’ve been doing this for 24 years, and right now you’re getting the best out of Ford and General Motors,” Cunningham says. “We’re not losing people like we were. There are a lot of operators who have some credit, and they also have a little money to put down if needed.”
The vehicle turnover rate for an average operator is about three years and four months, so new cars are frequently needed. Kenneth Schapiro of AAA Worldwide Transportation in Clinton, N.J., says his company adheres to a three-year limit on vehicles. The vehicles can get up to 200,000 miles in this time, so to keep providing customers with the high-quality experience AAA prides itself in, the company sells the cars after three years and then re-ups.
Schapiro’s company opts to purchase its vehicles over lease, but one thing that proves important for either case is for operators to find specialized finance departments that know the industry. “That is the biggest key,” Coolbaugh says. “The commercial operators need specialists, and we have been specialists for more than 18 years. We understand the equipment and collateral, and we understand the credit requirements.”
Chauffeured transportation companies need new vehicles for two reasons: They are replacing older vehicles, or they are expanding their operations and increasing fleet size. In either case, it behooves the operator to look into a company experienced in livery vehicle finance because there are often special incentives and benefits laid aside they might not otherwise know about.
Cunningham walks his customers through this process every day at Acton Fleet Sales/So Cal Penske. “In the car world, a potentially giant profit center for dealers is the financing of cars, where the longer we have them finance for, the more money we can make. But for livery vehicles, this is about the worst thing you can do. We prefer 36 months and strongly suggest a short term if they can handle the payments, because the vehicles are going to be turning over and losing value quickly.”
There are also rebate options offered as fleet incentives to operators. Once an operator has an established business and profit stream, the natural progression is to look for more business. If an RFP comes back with the green light, an operator suddenly may need numerous brand new vehicles, which can get pricey.
Fortunately, many manufacturers of limousine vehicles have rebates and fleet incentives in place to help operators with their business. The incentives are mutually beneficial because it lets the operator get cars quicker and with less hassle so they can be put to the road to generate income.
“It is very common for a company to get a new contract and need to add three, four, or five cars,” Cunningham says. “And if they have to put down $10,000 on each car as a down payment that is a lot of money. But if the customer has good credit, there are fleet incentives to help reward operators by offering rebates and deductibles that can go toward the down payments of the vehicles.”
A line of credit is then opened with the operator and the finance company they are working with. The two work together to help make sure the operator has the tools to succeed, which will lead to the operator buying more cars from the manufacturer. It becomes a symbiotic relationship.
“I can’t tell you how many two-car operations I’ve worked with that are now 20 or 30 car operations,” Cunningham says. “If we do our jobs right and they are successful then there is more opportunity for us to sell them more cars.”
Healthy Credit and Inside Knowledge
As always, it is important for operators to keep their business credit score as healthy as possible. And this includes the little things too — just as in personal credit lines — that need to be handled and not overlooked.
With good credit, it becomes easier to qualify for vehicle financing, but even without, it’s not the end of the game. There are still many different kinds of loans and leases available that can be more suitable for operators depending on their fleet size, credit rating, and capital.
Advantage Funding specializes in financing vehicles for operators of varying credit scores and fleet sizes. With the various options available, Advantage can offer targeted financing that is in the best interest of the specific operator.
“We have an initial conversation to understand the operator’s background, and understand if they only do leases or only do finance contracts,” Coolbaugh says. “We have the ability to do all of the financial instruments; it’s all relative to the purchasing power of the customer."
Purchase Vs. Leasing: The Gritty Details
The terms on whether it is best to lease or purchase vary mainly around three things:
1) The operator’s credit score and access to lending;
2) Available capital of the company;
3) Number of vehicles the operator is looking to procure.
From there, an operator has choices of different finance products that best fit his or her company. The end-value of the vehicle is brought into play, and often allocated toward either a down payment for a new vehicle, or if in a pure leasing agreement, is simply exchanged for a new vehicle.
There are some finance programs that mirror a leasing arrangement, such as the dollar buyout lease, which allows the operator to lease the car and then purchase it at the end of the lease for $1. Or there are purchase upon termination leases, where an operator can make payments on 90% of the value of the vehicle, and then a final payment on the remaining 10% value.
There might be credit limits on an operator that make leasing a more practical option, so debt on the books is kept to a minimum. Close-end leases, also known as “walk-away” leases, allow you to simply return the vehicle at the end of the lease. Many livery finance companies offer this option because they may have a vendor that they sell the used cars to. Because they know the business, they can predict the condition, miles and value of the car to make for a steady business flow with the vendor.
When the term is up, the operator gets a new car delivered and the old one picked up. On open-end leases, the lessee uses up and pays off most of the value of the vehicle. The lessee will often write a residual on the back end to lower the payment. And the value of the car at the end of its use can be forwarded toward down payments on new vehicles.
Deciding whether to lease or buy varies by company and even by vehicle, but the finance experts in the limousine industry are well versed with most operator situations and can find the right solution.
Navigating through the field of obtaining vehicles for commercial use can be complicated. By researching available options, and by consulting with professionals who know the business, you can make the absolute best deal for your company.
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