Truck for Sale: How Do You Raise the Money?
Many companies deferred major capital expenditure in 2010 because of the harsh trading conditions, but the New Year has brought in a blast of fresh trading air. With the reinvigorated trucking industry, and the lure of increasing business demand, 2011 is going to be the year when many operations upgrade their equipment. The issue is not going to be whether that truck for sale should be acquired now, but how to pay for it.
Outright Purchase versus Leasing
Smaller operators have been faced with a double crunch - banks and traditional finance sources have not been lending money freely (the so called "credit squeeze"), at the same time, trucker profitability has been a real issue (the recession).
With credit sources becoming easier to obtain (though not "easy") and increasing business levels, potential buyers now have the motivation, the money and potential finance sources to buy.
Even if you have cash to make an outright purchase, there are several reasons why you shouldn't finance the truck or trailer purchase with cash. For a start, a cash purchase restricts the tax deductable to allowable depreciation only. There is no allowance for the finance costs associated with using your own money and in addition, by funding the purchase with cash you are assuming 100% of the risk yourself. Finally, using your cash means you reduce your own financial security - once you've spent the money it is difficult to recover the cash except by using the asset you've acquired.
On the other hand, cash does help with price negotiations but, at the moment this is a buyer's market in any event so you will be getting an extremely low price in any event.
Leasing provides several distinct advantages over outright purchase.
The first advantage is that the requirement for a large capital outlay is removed as the cost is spread over the life of the lease. This eases the business' cash flow and allows the operator to retain cash within the business to increase stability and financial strength. Applying for a lease is as simple as filling in a simple form and there is a wide variety of lease programs available to handle differing financial and business situations.
Leasing also provides tax advantages because while the tax depreciation deductible may be claimed (either directly or through lower leasing payments if the leasing company claims them), in addition the operator can claim a deductible in respect of the leasing charges too. In essence, the IRS subsidizes your truck operation.
Leasing also does not put your business at a greater risk than using all your cash resources. Break clauses can be used to allow you to get out of the lease should you need to; effectively, this gives you an opportunity to get out of the deal if your business is not as successful as you needed it to be. Leasing also provides an additional boost to your business credit rating. This makes your business a more attractive proposition for all other sources of credit and finance providers. There are disadvantages to leasing however; you will pay more for the truck over time than an outright purchase (the interest charge even after tax deductions), you also need to ensure you can make lease payments on time and finally, a lease is a legal document which you need to understand and this may mean hiring a lawyer to help you.