Thinking about leasing forklifts?
Here are some things to consider
Just as the comfort, reliability and feel of forklifts have undergone incredible change, so too
has the manner in which they are acquired by plant operations.
Gone are the days when the acquisition of a forklift fleet was nothing more than one big price
negotiation. Salespersons and customers, in many cases, are no longer spending their time volleying prices back
and forth across the conference table.
Instead, these battles have taken a back seat to a far more sophisticated discussion covering
a full menu of retail financing options designed to help customers achieve their business objectives.
When structured properly, lease packages provide guaranteed, maximum running time from your forklift
fleet. Today's lease arrangements can be structured to cover all parts and labor costs during the contract term.
Lessees benefit from the use of temporary equipment during covered repairs and extensive planned maintenance programs
covering both parts and labor. Leasing provides precise cost forecasting for the contract term. Plus, it serves
as an effective expense control device.
Leasing also eliminates costs associated with hiring and training mechanics, maintaining an adequate
parts inventory, lost time during diagnosis, repairs and "redo's" as well as administrative and clerical
time spent managing a forklift fleet.
While greater sophistication and improved communication between customers and sales persons are
key reasons for the increase in forklift leasing activity, technology also has played a major factor.
Advanced, user-friendly software programs allow salespersons to fully disclose to customers how
they arrived at net present values, why a particular interest rate was set, residual amounts and guarantees and
other factors impacting a lease structure.
With full disclosure, customers are able to see exactly how their lease payment was calculated.
Remember, if a manufacturer isn't willing to provide full disclosure for a proposed lease vehicle,
then take a hint. It's probably a deal that's too good to be true.
Still, customers should keep in mind that the decision to lease should not be based on finances
alone. A lease vehicle also should address manufacturing productivity levels, equipment utilization and obsolescence,
particularly if an operation is considering outsourcing the management of its forklift fleet.
If a lease vehicle appears to meet your business objectives, then the next step is to decide
how it will be structured—as a capital or operating lease.
- Under a capital lease, a customer takes ownership of the asset upon contract inception. This
transaction must be reflected on a company's balance sheet with depreciation taken on a regular basis.
- An operating lease, on the other hand, is more of a non-ownership arrangement under which a
business only pays for the portion of the asset it uses. When the contract expires, the customer stops making payments.
And, if structured properly, an operating lease can be kept off the balance sheet.
In order to qualify as an operating lease for accounting purposes, the lease structure must pass
the litmus test of the Financial Accounting Standards Board (FASB) Rule 13. In 1976 and later under subsequent
amendments, FASB 13 differentiated between the parameters for operating and capital leases.
Under the rule, a lease is considered a capital lease if it meets any one of four specified criteria:
- The lease transfers ownership of the property to the lessee by the end of the
lease term.
- The lease contains an option to purchase the leased property at a bargain price.
- The lease term is equal to or greater than 75% of the estimated economic life
of the leased property.
- The present value of rental and other minimum lease payments equals or exceeds
90% of the fair value of the leased property less any investment tax credit retained by the lessor.
- If the financing vehicle does not meet any of these criteria, then it is considered
an operating lease and can be posted on a balance sheet as an operating expense. Still, the transaction may need
to be reflected in the financial statement's footnotes.
As always, consult with your certified public accountant, tax advisor and financial advisor when
drawing comparisons to capital and operating leases.
Even after financial due diligence has been conducted, several non-financial factors must be
considered to structure an effective lease vehicle. These elements, which are examined during a comprehensive customer
application survey, include determining the severity of the customer application and the annual running hours for
each unit.
Only with this data can your salesperson match the economic life of the asset with the lease
structure.
For example, a typical internal combustion cushion tire forklift operating in normal conditions
(under 2,000 hrs./yr.) in a clean, non-abusive environment, should operate economically up to 11,000-12,000 hrs.
Under a properly structured lease, this truck is automatically replaced at the peak of its economic life as determined
by the aforementioned operating conditions and annual operating hours.
Whether you're considering the acquisition of a single forklift or a 1,000-unit fleet, keep these
tips in mind when discussing a proposed lease vehicle.
First, always conduct a lease-versus-purchase analysis. Determine if a lease vehicle improves
your cash flow, frees up credit and provides potential tax benefits.
Make sure your sales representative provides full disclosure which examines every aspect of your
lease package. You have the right to full disclosure—demand it.
You should be provided an exact residual dollar commitment.
When asking for a lease figure, don't ever settle for "about 'x' a month." Always ask
for a precise figure and back-up calculations.
Remember, it is the manufacturer's responsibility to ensure you have all the variables necessary
to conduct a thorough analysis.
Leasing your forklift fleet, no matter its size, can be one of the most important business decisions
a plant operation makes.
Still, like any financing vehicle, leasing has its share of complexities. But when explained
properly, customers are able to understand and appreciate the multitude of benefits these financing vehicles provide.
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