Forklift Leases Explained
The Pros and Cons of Forklift Leasing
When leasing a forklift, it can sometimes be confusing when faced with all the options. In this article, we will explain some of the different types of leases, the pros and cons of each type and we will show you ways to choose the best leasing options for you and your warehouse operation.
The Different Types of Forklift Leases
When looking at purchasing a lift truck, you will likely be offered a few leasing options. The different types of leases will include:
- Fair market value lease (FMV) also called
- residual lease
- operating lease
- Full payout lease (FPO) also called
- dollar buyout lease
- capital lease
- Full service lease
- Rent to own
Each of these leases can be good choices for your operation depending on your short term and long term needs.
What is a lease?
A lease is a financial vehicle that allows your warehouse to use a forklift for a given period of time. It is sometimes called a rental as you are paying for the use of the equipment only. The payment that you make on a forklift lease can include:
- The principal value of the equipment (the cost of the lift truck)
- Interest on the use of the money to pay the manufacturer at the start of the lease for the actual equipment
- Freight to move the equipment from the manufacturer to the end-user (your warehouse or distribution center)
- Installation and prep charges to put the lift truck into operation
- such as removing the packaging materials that cover the equipment during transportation
- filling the forklift with hydraulic fluid
- checking its operation and performing a QA (quality insurance inspection) prior to delivery
- Local delivery of the equipment from the local forklift distributor to the warehouse receiving door
- 30 day inspection to insure the lift truck has not encountered any problems since its delivery
- Profit and marketing costs for the forklift dealer
- The battery (or batteries) in an electric forklift
- The battery charger for the lift truck
All of the above are items that can be included in a lease payment.
What is a fair market value lease?
A fair market value lease is a forklift lease that has a residual value at the end of the term. What that means is, although you are using the warehouse equipment and reducing the value of the lift from being a brand new forklift to a used forklift, the lift truck can often still have a value (to someone) at the end of the lease. So what is that value?
The market will determine the value of the forklift at the end. After reconditioning, a company may want to buy the forklift you are using at the end of the lease term and might be willing to pay$10,000 or more for a well maintained 5 year forklift with low hours. The fair market value would be what the leasing company can sell the leased forklift for.
The market value of the lease is effected by the following factors:
- Condition at the end of the lease
- Is the lift truck heavily corroded, dented or broken?
- Has the reach truck been used in a freezer or cooler?
- Has the pallet jack been used in a briny or corrosive environment?
- Number of hours on the lift truck
- Is the truck very old at the end of the lease?
- A 7 year lease will have a lower residual that a 5 year or 3 year lease.
- A 5 year old used forklift leased for an additional 5 years will have next to no market value other than the scrap value of some of its components depending on its condition and use.
What is a full payout lease?
Sometimes called a dollar buyout lease or a capital lease. This lease is more like a loan. You borrow money from the leasing company to pay for the forklift in monthly installments. The payment will include the purchase price of the equipment and the interest costs.
What is a full service lease?
Like a rental payment, the full service lease includes the lease payment (which could be an operating lease or a capital lease) plus a portion to pay for its service needs. The service payment is a fixed price for the care and upkeep of a forklift to be sure the equipment is running reliably for the term of the lease.
What is a rent to own agreement?
Some materials handling equipment companies offer rent to own agreements for companies who for some reason are unable or unwilling to sign a long term contract for the use of equipment. It could be that their business is evolving or they are unsure as to the direction of the business growth. It could also be that the local decision maker is unable to sign a term contract due to some corporate restrictions at the time he or she needs lift trucks or other materials handling equipment. In any case, the distribution center, warehouse or factory does not want to enter into a term agreement.
A rent to own agreement is often a rental agreement that can be canceled at any time. However, there is an incentive for the warehouse manager to continue the arrangement for many months into the future.
Many times, the rent to own agreement involves a portion of the rental payment to be paid into an equity account each month. The value that is accrued on behalf of the warehouse manager’s company can be used at some future date to purchase the lift truck or a new lift truck. It is a way for a company to rent a forklift but also save towards the purchase of a forklift without obligation. Ask your local lift truck dealer for details.
Which lease option is best for my business? *Pros and Cons
Fair market value leases have the lowest payments. Here are the benefits:
- On a monthly basis, the payments are the most affordable
- You pay for only the use of the equipment. You do not pay for the value of the equipment you do not use.
- There may be tax benefits to leasing in this way. They payments may be tax deductible.
- If you intend to keep the forklift at the end of the term, you may find the forklift is more expensive to buy at the end of the lease.
Full payout lease have higher payments, but there are benefits:
- You own the equipment at the end
- The lease may not show as a liability (off balance sheet).
- A leasing company borrows money, adds profit, then lends it to you. The lease rate is often higher than what it would cost to borrow the money from your bank.
Full service lease works like a long term rental. Benefits:
- You need only make a monthly payment. Your forklift dealer is responsible for it reliability and repair.
- The payment may be fully tax deductible as an operational expense.
- May not show up as a liability on your books, preserving valuable credit lines for investing in inventory an other business priortities.
- The service portion is like an insurance premium and contains the forklift dealers costs, risk and profit. Paying for service as you go is more risky but may be less expensive you can stay on top of it and have the resources to manage the costs.
*Always check with your licensed accountant (CPA) before you entering into a lease to understand the impact of the local tax code on your business.
To compare two different leases and understand the impact of the lease rate on your equipment costs, visit this free to use online leasing calculator: https://www.warehouseiq.com/calculators/forklift-lease-payment-calculator/
Have we left anything out? Post your questions below.