WORK TRUCKS: Lease vs Pay Cash vs Loan (the truth!)

Hey everyone, it's Mike Andes and today we're going to be talking about whether you should lease your trucks, whether you should buy them with cash, or whether you should finance them and use debt and loans to buy your trucks. Because I truly believe a one size fits all approach does not work. Size matters when it comes to the type of advice you're taking. And the size of your business matters in terms of what type of financing you're going to use for your trucks. So. So let's break down the good, the bad, the ugly, and the ideal case scenario of what type of person I feel should be leasing, buying their trucks with cash or using debt. Now, let me preface all of this by saying that when someone does leasing or debt for simply tax savings, you need to be very careful taking their advice. Here's why. Most of the time when people talk about buying fancy trucks, fancy for their business, they somehow talk about in their 5th or 6th or 10th year of business, about how they had this premonition or this thought, they should go ahead and get really fancy nice vehicles and brand new all the time. And they had this change of heart because of their tax situation, because it worked well for them does not mean that the person's getting started. The person doing 100 or $200,000 in annual revenue should also go somehow get the cheat code, and that is go get a lease or go get a bunch of debt. Case in point was at Landscape Summit just a few weeks ago we had Tommy Mello, who has a business that does well over $100 million in annual revenue for garage doors. And he was speaking on stage and he noted the fact that he thought people should get brand new vehicles for their employees and for all of their trucks when they're out working throughout the day. And although I agree with what he said for his use case, what a lot of people missed that were listening was the fact that he did that when he was doing over $5 million in annual revenue and in an extremely profitable business that he needed to save money in taxes on a section 179. So although I'm going to mention tax incentives when it comes to leasing and debt, which there are, certainly they are there. The reason they are there is because the government knows that by increasing the amount of consumption and you buying more stuff, it's going to help the economy. Buying more stuff does not help your business. And so let me be very clear that if you are a massive company, leasing, getting financing definitely will help you when it comes to tax incentives, you'll be able to write things off, take advanced depreciation in the form of the section 179, be able to get all of, you know, a lot of tax savings. But for the person that is making hardly any profit, going out and getting these pieces of equipment for tax purposes does not make a lot of sense. If someone is making 500, $600,000 in annual profit and adjusted gross income, like $500,000 on their tax return, like that's their taxable income. By them going out and getting a section 179, they might be saving 40 or 50% on taxes because of their state and the federal tax rate. Whereas if you are making 30, 40, 50, 60, $70,000 in annual and what you actually show on your tax return to the government, the IRS, you going out and getting $100,000 truck so you can get a section 179 is going to help you very little. You might literally, after standard deductions and other things that you can take for like your house mortgage and things like that, you might literally be looking at a 5 or $6,000 tax bill. And yet you're going to go somehow say that you're going to buy $100,000 truck, $80,000 truck 2 to warrant saving 5,000 or $6,000 in taxes. It's absolutely crazy. So if you hear someone saying that they're doing Section 179 and they're financing and getting a whole bunch of debt, if they've been in business five, 10 years, if they're super profitable, if they have other businesses that are bringing a lot of very profitable revenue to them, keep in mind that they are saving a lot more on taxes than you for the same piece of equipment that they purchase on a section 179. Talk to your CPA. I suggest using homeservicecpa.com now let's go through leasing, buying with cash, and then using debt number one, leasing a truck. Now, there's different forms of lease. I'm very aware and I know some people are going to disagree with me because of there's different types of leases, but just using the standard type of lease, you're going to usually have some sort of down payment, and then you're going to pay over the course of 24 or 36 months, and then you have the option to buy it out or trade it back in for a new leased vehicle. So the pros are you're going to always have new trucks every two or three years, brand new trucks. It looks very professional. It's always looking good. And two Three years is a great time to always get new trucks. Your guys are gonna love you. Your brand is gonna look on point. You're gonna have no maintenance or repairs. Cause when you lease a vehicle, they're gonna take care of the oil changes, they're gonna take care of the tires and the brakes. Everything typically is completely included. So no downtime virtually because you have a lease. A lot of times they'll even do like a lease replacement program, which is like, if something goes, if something breaks down, they'll give you another truck. It's pretty awesome because you don't have to worry about maintenance and repairs at all. Massive tax incentives, because even though you lease the vehicle and you technically don't, quote, unquote, own it, you can still take massive deductions on your taxes. Talk to a cpa, but you can definitely use advanced depreciation still on these vehicles. And what's the best thing about a lease is very low down payment. You might be looking at 15, 20, maybe 25% down payment on a vehicle. So if you're buying a $30,000 vehicle, you might be walking away with seven, $8,000 down payment in order to get that $30,000 truck. Great. Now let's talk about some of the cons of leasing. Number one is that when you have a lease, because you aren't theoretically the owner of the vehicle free and clear, your insurance premiums are going to be very high. They're going to require certain limits that are extremely expensive when it comes to insurance. Very low deductible, having full comprehensive and collision. And I know some people are like, you should get all insurances, that's fine. But if you're going to take it from $100 per month, if you did, Lia, and slightly higher premiums or slightly higher deductibles on your comprehensive. And now you switch it to where you have to have a 500 or $250 deductible. You have to have max coverage on everything. You might go from $100 a month to $300 a month just on your insurance for that vehicle. Very important, because everyone always takes into account the lease payments, but they don't take into account the fact that your insurance might double or triple because of those advanced premiums and deductible changes. Also, some cons with the lease, if you're not planning to buy out the lease and you actually are, get the new truck every couple years.

It's frowned on if you're painting the truck or modifying the truck in any way. So if you're stripping off the bed. If you're painting the vehicle, lost a marker if you're painting a vehicle. All of those sort of things, not great for a lease, especially if you're trying to cycle them through. Now, if you decide not to cycle them through, but rather buy it out at the end of the lease and actually own the vehicle, there's a very good chance, especially if you're in the home service industry, where there's dings and dents and lots of wear and tear in the vehicle, there's a very good chance that the amount that you have to buy it out for is actually higher than the blue book when it comes to buying out the truck. Because you might pay 15, 20% of the upfront, and you might pay another 10 or 15% off over the next couple years in terms of the principal. However, you're gonna be buying this thing out and you might still owe like 70, 80% on it, and it's worth 50 or 40% of what you purchased it for originally possible. I know that in crazy times like 2020 and 2021, things went up in value, but that's not standard that has. I don't predict that happening in the future. Who this is ideal for leasing trucks is gonna be for people who are trying to maximize tax incentives for established businesses that have extremely high margins, have lots of profit, because again, your highest $100,000 as a deduction on your taxes might save this person 40 or $50,000 in taxes. Someone that only has 50, 60, $100,000 in adjusted gross income that they're actually reporting to the irs, them getting a very nice truck, they literally might be saying 5 or 6% on taxes. So very important. That's why a lot of the more established, bigger companies, they'll do the leasing programs with equipment or truck manufacturers is for that reason also very ideal for a company that is established and wants that premium brand. They want new trucks and they want their brand to be affiliated with, always new, always clean, never breaking down, and always looking extremely premium. Great for being able to have a premium brand and therefore have a premium price. Now, let's talk about buying things with cash. So the pros of buying things with cash is that you have the ability to have lower premiums on insurance because you are not required to have as comprehensive of insurance. Instead of a $500 deductible, you might have a $2,000 deductible, and that's okay. And you don't mind. And you might not have comprehensive or collision type of Insurance premiums on the truck. And that again might save you $100 or $200 a month, just in the insurance premiums being lower. Again, it's an option. You don't have to. You could always take the higher insurance. And me personally, I like to have lots of insurance, but high deductibles because honestly, I'm only gonna use an insurance in worst case scenario. I don't want to use insurance on little things because it's gonna make my insurance premiums go up and people aren't gonna wanna insure me. It's crazy. Like the more you use insurance, the more it costs. So I'm only going to use it if like something blows up or there's a massive issue. We used a truck, have a truck fire in it, and I didn't even make an insurance claim because it didn't want to affect my entire business. That over the course of the next few years, I probably would pay the truck three or four times over just by the premium bump that might come up by having a claim on the insurance. So I personally like high deductibles, but lots of insurance just to make sure I'm covering the case that there is a 50, $60,000 mistake that is made. Cash pros, these are the good things. The fact is, a lot of times you can get a lower price on the private market using cash. Not a lot of private buyers are going to want to do financing. They don't want to go through a bank. They don't want to do a loan with you. They don't want you to take over payments. They just want cash, baby. And so sometimes you can get better prices on the private market. You take the same exact vehicle that is used and you throw it on a used car lot. You're paying an extra 20 or 30% sometimes. So you can get a better deal using cash if you have it. And that is a pro, is getting a better deal. And therefore there's less depreciation when you drive it off the lot because you've already paid a lower dollar amount in terms of the actual price of the vehicle. Some of the cons though of paying with cash is that there is a large cash requirement. You're going to suck out all of your cash. And if you only have 50, $60,000 to get your business started, if you're buying a nice truck for 30 or $40,000, you just wiped out half or more of your cash reserves. And now what do you do? You have a nice truck and no business, no marketing. You don't have any customers, you don't have any other equipment, you don't have any employees. And there's still a lot of other expenses. So sucking a massive amount of your capital, especially when you're first getting started, that is definitely a downside of.

Having to pay things with cash. It also inhibits your growth because by sucking all the cash of the business, it doesn't allow you to go spend that money on marketing or hiring or buying other things in the business that are going to generate more income. Like a piece of equipment that you might be able to charge customers more for. That's going to inhibit growth is just the fact that you're sucking the cash out of the bank and into a fixed asset, which is your truck cash. Who is this ideal for? It's going to be for someone who's a little more conservative with the rate or trajectory of growth that they want to have for the business. Again, what who this is ideal for comes down to what do you want from the business? If this person wants to have the security and the mental security and be able to go sleep at night knowing that they don't have a bunch of debt over their head, they don't have a lease that is coming due, or if they ding the truck and then they can't convert the lease back in, they just want a little more peace of mind and they're okay with a slightly lower growth rate. They don't need to go from 200,000 this year to a million next year and then 4 million the next year after that. If you're going to do that, you're probably going to need some sort of leasing or financing because you need the cash to in the business to be able to fund all the other expenses, not buying trucks. So definitely a more conservative rate of growth if you're paying with cash. A lower debt to income ratio. Again, someone just a little more conservative doesn't like to have a lot of debt. And that debt to income ratio is something you want to monitor and you're just running a riskier business. If you're having a higher debt to income ratio also great. This is ideal for someone that doesn't have any credit history, they don't have any credit score and they can't go get a lease, they can't go to get debt. And if they did, they're going to pay absorbent financing fees or interest. And so therefore someone with no credit history. Great. That's ideal if you're paying cash. Also, someone who's going to pay with cash is someone who doesn't want to have a lot of risk and they're an opportunist, which means when times are good, they'll pay for things with cash. So that way, when there's a recession or times get bad, they don't have any debt and they don't have any obligations and they have a lot more freedom. And they're not bound down by a bunch of fixed expenses. Because during a recession or potentially even if your business starts to struggle or you don't get as much work, having high fixed expenses with lease payments, high premiums and deductibles, high loan payments that you're making on debt, those things are fixed expenses that don't go away despite you making less money in revenue. So having less fixed expenses, definitely someone that is ideal for paying with cash because they're going to be able to spring on opportunities when everyone else is laden down with debt and fixed expenses. Now, let's talk about the person that spends a bunch of money in buying trucks using debt and loans. And I'm trying my very best to be objective between all these three, because I don't really have a shoe in the game here. I'm just trying to give my feedback of who potentially might want to use these different financing options. You do what's right for you because all of us are in different stages of our business in terms of size as well as the objectives and goals that we have for the company. So debt, going into debt, getting a loan on the vehicle, whether that be from the dealer or whether that be from a bank. Now, here are the pros. There's actually a possibility that you can get no money down and you can actually roll all the financing costs into the cost of the vehicle and walk off the lot without spending hardly any money. That's a great pro. Literally no money down to get a great truck, an asset you're able to go use for your business and make revenue. That's awesome. Another pro is that use leverage. Leverage is the ability to be able to take a dollar, but then get $3 worth of buying power. That's leverage. So by having a little bit of cash or a little bit of a down payment, you might be able to get 4, 5, 6 dollars worth of asset a truck just by spending the $1. So leverage is a great opportunity, allowing you to have much more growth. You can grow a business on debt much faster. Big businesses, lots of very big large companies have a lot of debt, and they do that in order to be able to grow very quickly. It's a great tool to be able to grow faster than if you were just to use cash. Now some of the cons is that honestly if you buy a truck, especially if it's new and you get debt on it and you roll the financing charges into the vehicle's payment, immediately you're probably 20 to 30% underwater on that asset, which means it's worth less like by 20 or 30% compared to what you owe on it. I never want to owe more on an asset than what I have in equity. I just don't. And so even with my real estate, a lot of my properties, I have equity of 40, 50, 60% because I hate the idea of ever it being reclaimed. If I can't make a payment or something goes bad, I'm just a little bit, bit more risk adverse. But if you a con of having debt, especially if it's new, is immediately you are underwater on that vehicle. Which means if something ever goes bad, the bank would rather come pull the truck out of your hands because you owe more on it than it is actually worth. Another thing with debt is you're either going to have interest or you're going to have financing dollars. Okay? What that means is you're either going to spend interest of 5, 6, 7, 8% depending on what your credit is, depending on what the current interest rates are, you're either going to pay interest payments or you're going to have to pay financing charges. Because guess what? Even if you get 0% down and you don't put any money down in that vehicle, I guarantee you 5 to 10% is being tacked on that purchase price and you're not getting any discounts. You're not going to be able to come in and start haggling on price. If you're asking for no money down and financing, you're going to be paying top dollar plus another five, $10,000 in financing charges. Oh, it's zero percent down. No it's not. You're getting financing charges wrapped up into the price of the vehicle and you're simply willing to accept a higher price. It's literally like going to someone selling their house and like, hey, look, I don't have a lot of money, but I'll give you $30,000 more. You're asking for 100,000. I'll give you $130,000, but I don't have any money. So just give me your loan, give me the loan you currently have and we'll make it work. It's great in theory, until the market go down or there's a tough time or there's a recession. And so definitely a con is that you have interest or the fact that you're actually having a financing charge. You're paying so much more than the asking price simply to be able to walk away with a low down payment or no money down. There's also much greater risk during a recession because. Because when the value of that vehicle goes down 20% in addition to it already depreciating a lot, and you have a lot of fixed expenses, and guess what, there's something that banks don't like to do during a recession that is not like skip payments. They're going to come, collect their assets. They might even liquidate or call your loan in the case where you owe more on that asset than what it is worth. Okay, so during a recession, the value of these trucks go down. We've all been used to 2020 and 2021. When truck values go up, that doesn't happen typically in a recession, they go down 30, 40, 50%. And so if you go into a recession and you have debt up to the hilt and you're drowning in it, bad news. If you have a whole bunch of debt, who this is ideal for, who should finance their vehicles with loans? Fast growing companies that need cash. Because if you're growing really fast, you need cash for opex, that's operating expenditures, or for advertising, expansion, growth, acquisitions, hiring. There's a lot of money that is required to grow a business. And I've always said growth sucks cash. So the last place I want to put my cash if I'm growing really quickly is in hunks of metal and tires. So I should finance those using debt so I can grow much faster and then take my cash and deploy it against advertising. Getting more customers, getting a bigger shop, getting an office person, hiring more employees. So that's the route if you want to go very, very quickly and move very fast and grow your company extremely quickly. That's not for everyone. I've seen plenty of people implode and explode during a recession. And the companies that typically fail during a recession and when times get tough are the ones that have a whole bunch of debt or they've leased a bunch of vehicles. This is the much more conservative route, but it's also the slowest route to get there. You're not going to grow 100%, 200%, 300% year over year and a million and five million and 20 million. You're not going to do that with cash simply because you will not have the cash to be able to buy all of your assets without using debt. So I hope that was objective enough. If you want more information, check out mikeandy.com and you're like, who in the world are you? Well, I'm the CEO of Augusta Lawn Care. We have 120 plus locations around North North America. We do lawn care and landscaping. So I've seen all three of these play out, both for people getting started as well as for companies that are in multiple millions in revenue, have multiple locations, and I personally own eight of those locations. So I personally use cash even now. I'm Mike Andes. We'll see you tomorrow.