Leasing Through an ILC: What's Old Is New Again
Chrysler Financial is out of the leasing business, and GMAC and Ford Motor Credit are slamming on the brakes. NADA predicts 700 dealerships will close by the end of 2008, and another 900 next year.
Detroit’s Big Three may become Big Two and run out of cash by the second quarter of 2009. Residual values are still in the dumps.
What does this mean to you? It’s a good time to rethink how you procure your fleet. I recently surveyed a handful of independent leasing companies to see how they’re faring in light of the downturn in the economy, the credit crunch and fluctuating gas prices. Their solution is not new, but it is especially relevant now.
If you’re not familiar with them, independent leasing companies (ILCs) offer a fundamentally different business model than a manufacturer’s captive finance company. While the captives handle strictly auto financing, ILCs are not tied to a single manufacturer and they provide fleet management services such as acquisition, title and registration, fuel, maintenance and remarketing.
Their sweet spot is small fleets like yours—those that have fleet management issues but don’t have the financial resources for a dedicated fleet manager. This model differs from the larger fleet lessors, who are not in the business of handholding small fleets. ILCs, on the other hand, are used to it.
ILCs say fleet business is down, but it hasn’t dropped as much as the consumer lease business. ILCs told me they are funded by banks that, for the most part, did not sink in the subprime quicksand. ILCs have plenty of wiggle room under their credit lines, though these days they are forced to take a harder look at new fleet customers with unproven or poor credit. Some ILCs say their cost of funds has gone up a couple of points recently, and for others it has not. Some of this cost is eaten by the ILC and some, to no surprise, is being passed along to the customer.
ILCs are saying that with the captives’ pullback, some dealers are turning to ILCs to write leases. This is happening more on the consumer side, but it is indicative of how the market is changing. Those subvented lease deals with the amazing monthly quote are gone. ILCs could never compete with a subsidized lease, but it was not their market anyway. In place of that, they have traditionally offered, and still do, the flexibility and market intelligence that will benefit a fleet customer for the long haul.
How? ILCs can structure flexible lease terms, whether that’s accelerated payments to help your tax situation, or step payments to help you conserve capital. Smart lessors will also look to move you out of a lease when the market conditions are advantageous. They may even offer some flexibility with excess mileage. (Try that with a captive lease.)
With this credit crunch, why are you financing your vehicles through your bank? A closed-end “operating” lease is off-balance sheet, meaning it does not appear as a mainlined debt obligation. Leave your bank lines free for inventory, hiring, payroll and other day-to-day activities.
Watching residual values is like following the stock market these days. A closed-end lease leaves the residual value in the hands of the lessor, which is a smart play for the small fleet—it’s not your business to worry about resale values. You can still finance your vehicles or use an open-end lease if you plan on running your vehicles into the ground, at which point residual values will be of less consequence.
It is the ILC’s job to adapt to these tremendous changes in a way that’s advantageous to you. The ILC’s business model is designed to keep a fleet customer, not just collect a fee. The idea seems rather quaint these days, but it’s more important than ever. BF