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Sale-Leasebacks: Infusing Cash into Truck Fleet Businesses

Date: Jun 24, 2020 @ 07:00 AM
Filed Under: Transportation Finance

The transportation industry has continued to look for ways to absorb the drastic logistical challenges and sharp economic decline resulting from the COVID-19 pandemic.

Sure, demand for food distributors skyrocketed after the outbreak causing many distribution companies to weather the flood of increased demand that comes with schedule and logistics adaptations. Meanwhile, the transport of construction, retail and goods to non-grocery businesses plummeted when the pandemic shuttered stores and forced consumer spending downward on non-grocery items.

Both cases placed severe economic strain on an industry that was already operating on razor-thin margins resulting from its highly competitive nature.

Financial Strains Hit Transportation Fleets
In the early days of the pandemic in March, consumers flocked to grocery stores looking for many food and household sanitization items. This forced the number of spot loads posted for transport to jump 39.1 percent, while the number of drivers looking for loads increased by 6.3 percent in March, compared to the previous year as reported by DAT Freight and Analytics in a story published in the Denton Record-Chronicle.

Even though the demand for loads increased, shipping rates dropped, placing further financial strain on transportation organizations. According to DAT, the industry is facing downward returns since rates have declined 12 percent in April. Food distributors with private fleets certainly felt this downward trend as well. Mark Allen, CEO of the International Foodservice Distributors Association (IFDA), said recently the industry is expected to lose $24 billion through the end of July.

Construction fleets are also facing challenges. According to PWC, “Some construction projects have been delayed, and some canceled, as a result of the impacts of COVID-19 on the companies and governments that commissioned them. Further, possible supply chain bottlenecks of equipment and materials — including structural steel and glass from Asia — could cause project delays in currently funded projects, or reduced spending on future ones.”

Aside from handling the financial changes, companies with private transportation fleets have had to scrutinize significant preventative measures needed to ensure the health and safety of customers, drivers, and everyone that is in contact with goods that are transported and delivered.

These organizations must rely on their asset management partners to ensure the trucks in their transportation fleets continue to operate as efficiently as possible to safely deliver construction, food and essential goods during the COVID-19 health pandemic and containment efforts.

Companies with Private Fleets Building More Flexibility into Their Daily Programs
It is imperative that companies with private transportation fleets recognize they must be as flexible as possible with their own business models. The pandemic has forced some fleets to scale their truck utilization depending on their customers’ business situation. This has created a shift in some companies and the way they approach their own business and driver programs.

Some fleets are suddenly in need of additional trucks to help keep up with increased capacity demand. These are immediate needs, and the structure of their truck deal needs to be flexible to meet this urgent demand. The structure must also allow them to return the asset when the impact of the current circumstances return to normal, which is an unknown at this point, even though some states are beginning to rebound slowly.

One option that works well in this type of scenario would be a sale-leaseback agreement. A fleet can select the assets that are older models, which are inefficient and more unreliable, and work with a firm that can purchase those assets and lease them back for an interim period and then transition to new equipment when ready. This would enable the fleet to generate cash. The cash gained can then be used for immediate internal needs or simply provide extra working capital.

A sale-leaseback program allows for the downsizing of fleets if an organization has a surplus of trucks, and it will have a positive effect on the bottom-line P&L since the ensuing lease payment will be lower than the current depreciation charge.

The program infuses more flexibility into a market that is already seeing significantly fewer new Class-8 trucks sold in 2020. ACT’s North American sales forecast for 2020 is 151,000 units compared with the year-earlier total of 333,800.

Having additional cash on hand is critical for today, but the flexibility to upgrade to newer truck technology with advanced safety features tomorrow will help fleets come out of the pandemic with a significant competitive edge through financial and operational efficiencies gained.

Benefits of a Sale-Leaseback

  • Liquidity
  • Right-sizing of the fleet
  • More efficient use of new capital
  • Reduction of risk to seller
  • Excellent tax treatment for seller
  • Avoidance of debt restrictions
  • Ability to upgrade to new, cost-efficient and safer trucks

New Truck Upgrades Cash Today, Newer and Safer Trucks Tomorrow
A sale-leaseback program helps position companies with transportation fleets favorably for tomorrow’s competitive environment. Advanced business intelligence has helped America’s corporate transportation fleets leverage data analytics, asset management and flexible financing to identify and act upon vehicle obsolescence while sustainably driving down supply chain costs and increasing productivity. In addition, companies are now paying closer attention to their trucks’ safety obsolescence, where data shows the impact new safety technologies have on fleets and their drivers, and the savings that newer technologies and shorter lifecycles contribute to the bottom line. A recent industry survey revealed that 11 percent of transportation fleets estimate they have saved more than $1 million in crash avoidance by upgrading to newer trucks with advanced safety features.

This win-win scenario helps companies realize immediate near-term relief for the business today, while all organizations continue to do what it takes to get through the hard times of the pandemic. However, this program also helps to position businesses favorably for tomorrow through a stronger long-term financial position, with the opportunity to upgrade into newer, more efficient trucks that boast the industry’s leading safety advancements.

John Flynn
Chief Executive Officer | Fleet Advantage
John Flynn is Chief Executive Officer of Fleet Advantage, a leading innovator in truck fleet business analytics, equipment financing and lifecycle cost management.
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