Building a Commercial Fleet 101

A commercial fleet of vehicles is an essential investment for many companies. Whether the vehicles will be used to deliver finished products, transport corporate executives or for some other business purpose, building a commercial fleet represents a substantial commitment that you should know how to manage effectively.

No matter if you need 10 vehicles or 1,000, you'll have to make a lot of substantive decisions as you build a commercial fleet—decisions that may have a big impact on both acquisition and operating costs. Here are some of the most important considerations for setting up a business fleet of cars, vans or light trucks.

Deciding to lease versus buy fleet vehicles

Like any other business equipment acquisition, deciding whether to buy or lease your fleet vehicles is an important first step.

Benefits of fleet vehicle ownership

Your business needs may dictate whether fleet ownership makes sense. For example, owning gives you more control over any needed customization—whether that means adding unique logo designs or industry-specific hardware or making some other modification. If you own, you'll also build equity over time as you pay down any loans you might have obtained.

Unless you're planning on purchasing the vehicles outright, you'll need to obtain some form of financing—typically either a term loan or a business line of credit. Depending on which option you choose and your lender, you may also be required to make a down payment.

Advantages of fleet vehicle leasing

Meanwhile, leasing is a pay-for-use model that in some cases may include the option to buy once the lease term expires. Leasing may be more practical in some situations. For example, companies that lease may be better positioned to upgrade their vehicles more frequently. If your vehicles are used as an executive perk or if your drivers rely heavily on top-of-the-line navigation and safety features, vehicle upgrades may be particularly important.

Cost of fleet financing

Ultimately, the decision to buy or lease fleet vehicles often comes down to cost. While monthly lease fees are typically smaller than monthly loan payments, there are several other factors to consider.

Evaluate the monthly cost

As a first step, you'll want to use an equipment purchase versus lease calculator to determine how much each option will likely cost on a monthly basis.

In addition, be sure to consider other expenses, such as the cost of maintenance and disposal. While leasing typically means that you'll come out ahead in maintenance costs, building equity through ownership may pay off when it's time to replace a vehicle. Also, if you anticipate heavy use, be aware that leases often tack on extra fees for excess wear and tear or mileage above a stated amount.

Consider the tax impact

Another big factor when comparing the cost of fleet ownership versus leasing is the tax impact. With regular pay-for-use leases—also known as operating leases —monthly lease payments may be deducted as a regular business expense on your federal tax returns. But monthly payments under a lease-to-own contract—often referred to as a capital or finance lease—don't qualify for a business expense deduction.

A major advantage of ownership is that purchased vehicles, as well as those acquired via capital leases, are considered depreciable assets. As a result, you may claim regular depreciation as well as Section 179 and bonus depreciation for tax purposes. But while vehicles are generally viewed as qualified equipment, keep in mind that they must be used for business purposes more than 50% of the time. Likewise, there are some differences based on the weight or type of vehicle.

It's a good idea to speak with a tax specialist to determine which of these tax breaks may be most beneficial to your business.

Fleet financing options

Fleet financing is another important decision, and there are many options to choose from. While it's possible to purchase vehicles outright, many businesses choose to finance or lease new commercial equipment. Here are some of the more popular equipment financing solutions and a summary of how they work.

Term loan

With a term loan, you agree to make fixed payments for the specified term—anywhere from 2 to 5 years depending on the type of vehicle and your cash flow needs. Because the vehicle provides collateral for the loan, some lenders may offer 100% financing, including soft costs such as sales tax.

Guidance line of credit

Flexibility is a key advantage with a guidance line of credit. You may withdraw funds as needed, and you'll have the flexibility to finance or lease vehicles from multiple vendors. A guidance line of credit is nonrevolving, which means any withdrawals you make will reduce your available balance.

Fair market value, or FMV, lease

With an FMV lease—also known as a true lease—you'll pay a fixed rate throughout the duration of the agreement. At the end of the lease term, you may exercise an option to purchase the vehicle based on its fair market value at that time. Because your business won't automatically take ownership of the asset, an FMV lease is considered an operating lease.

$1 buyout lease

A $1 buyout lease is a capital lease that lets you buy the leased asset for a nominal amount—typically a single dollar—at the end of the lease term. Although you'll make lease payments throughout the duration of the contract, the vehicle still shows up as an asset on your company's balance sheet due to the inevitability of the purchase.

Terminal rental adjustment clause, or TRAC, lease

A TRAC lease is a unique form of fleet financing that is more common for larger commercial fleets. These leases tend to be much more flexible than other types, allowing companies to choose between lower monthly payments and higher residual value versus higher monthly payments and lower residual value. At the end of the lease, if the vehicle's value exceeds that residual value, your business will receive a rebate. However, if the vehicle's value is lower, you must compensate the lessor. TRAC leases may be either capital or operating leases.

Fleet management best practices

The choices you make when acquiring and financing your fleet may have a significant impact on your finances. However, the costs associated with operating a fleet may be just as significant. There are a few fleet management strategies that may help you reduce these expenses over time.

Controlling operating costs

Thorough fleet management involves planning and budgeting for costs associated with operating your vehicles. Some common fleet operating costs include:

• Annual fees for plate renewals and inspection stickers
• Commercial auto insurance
• Emission compliance costs
• Driver training and licensing updates
• Upfitting expenses—such as adding hitches and ladder racks
• Routine maintenance and emergency repairs
• Fleet fuel costs and tolls
• Potential fines and penalties
• Parking and storage fees
• Cost of moving vehicles to different locations
• De-customization of vehicles for sale or return

You'll also need to ensure drivers don't exceed mandated limits on duty hours. Some expenses associated with this requirement may include paying for lodging or assigning multiple drivers to one route.

Shopping for fleet insurance

Insurance premiums are another important cost to consider. Because of how heavily fleet vehicles are used, be aware that commercial fleet insurance may be more expensive than personal auto insurance. Notably, insurance underwriters will likely consider your driver safety and maintenance protocols when setting your rates, so it's helpful to set up robust programs for that and other reasons.

You'll have many options for insuring your fleet, but choosing a provider that offers a comprehensive range of commercial insurance solutions may save you money and time.

Investing in efficiency

It may be beneficial to hire a fleet manager or outsource fleet management responsibilities to a third-party operator—especially if you're managing a large fleet of vehicles. The manager or operator could be responsible for functions such as recordkeeping, maintenance, compliance, training, transportation and storage, enabling you to remain focused on big-picture business development goals.

You can also consider purchasing fleet management software. This may increase the overall efficiency of your fleet by helping you collect and analyze data on fuel consumption, maintenance costs and driver behavior. Some systems may even be set up to geolocate vehicles.

Key takeaways

• A fleet of commercial vehicles is a substantial investment, and the decisions you make may have a big impact on your acquisition and operating costs.
• Deciding to lease versus buy fleet vehicles is an important first step. Monthly lease fees are typically smaller than monthly loan payments, but ownership offers advantages regarding customization, equity and depreciation.
• The costs associated with operating a fleet can be significant—be sure to budget for these expenses upfront.
• Depending on the size of your fleet, it may be worthwhile to invest in fleet management software, hire a fleet manager or outsource fleet management responsibilities to a third-party operator.