Is Leasing Our Vehicle Fleet Similar to Leasing IT Equipment?
Two of the most common leased asset types are vehicles and IT equipment, but the best practices for vehicle leasing and IT equipment leasing are not the same.
Vehicle Fleet Leasing
With truck and other vehicle leasing, you can cap risk by insisting on a Terminal Rental Adjustment Clause (TRAC) in the leasing agreement. This can provide a low rate with minimal risk.
The key element of a TRAC is a pre-established residual value for the vehicles. At the end of the lease, you can buy the equipment at that price or continue to lease by financing the predetermined residual value. With a properly structured TRAC, there are also provisions for returning or trading equipment, with adjustments made based on the equipment’s resale value vs. the residual value.
There is an inverse relationship between the amount of the predetermined residual value and rental rates. In general, the higher the residual value, the lower the rates. This provides cash flow flexibility. The key lies in how the residual and term rental structures are defined. Advice from accounting professionals is critical in evaluating such structures.
When procuring IT equipment using Fair Market Value leases, lessees can still protect themselves against risk. The key is to focus on issues beyond the rate and cap exposure to interim rent, retainable deposits, extensions, end of lease buyouts and other events such as default and non-compliant equipment return.
In some cases, buying IT equipment outright and putting the assets on regular refresh cycles internally is the best way to maintain the flexibility to upgrade at the most cost-efficient time. There are various types of closed-ended leasing and financing that can be used to spread the payments to match the asset refresh cycles.