Sheri Aaberg didn’t waste any time delivering one of her key points in a presentation about lease purchases in a workshop Sunday at the annual meeting of the Truckload Carriers Association in Las Vegas.
“One of the problems in the way it has developed is that it has a very negative perception in the industry overall,” she said. Aaberg should know; her company, Transport Enterprise Leasing, is a leading third-party provider of financing for lease purchases. She is the company’s COO.
A lease purchase is an agreement between a carrier and a driver, or a third party and a driver, in which the driver leases the truck, works usually for that carrier but not exclusively, and hopes to either earn enough money to buy the truck at the end of the lease, or be current with the loan and swap it out at the end of the lease for a new leased vehicle.
But it isn’t that simple. A lot of leases end in failures with unhappy lessees, often posting vicious social media postings about how they were ripped off by a company, with the company usually identified by name. In case the audience needed reminding of what they contain, Aaberg showed a few examples to her audience.
“They will shout it from the hilltops that things didn’t go well,” she said.
Aaberg traced the history of lease-purchase agreements back to the late ’90s and early 2000s. She said there had been “incredibly predatory practices” that were more prevalent in the past but that the stench of the past lingers. To combat the memes that show the practice as tilted in favor of the lessor, Aaberg said the industry would need to turn to social media “to get the successes out there.”
The title of the session was “Lease Purchasing: An Innovative Playbook.” But in the animated discussion that went on during the session, one innovation that was discussed was an old one: communication.
As one audience member said, “It’s just about being transparent and being up front.”
Another said, “You have to do a better job in making sure that person has the ability to fulfill the contract.” The audience member noted that just having a person sign the bottom line isn’t adequate; “you’ve got to make sure he can do it.”
And communication also involves touting victories. For example, one member of the audience saids that any time a company lessee pays off a three-year lease, the company’s owner takes a photo with the new truck owner and gets that out to an audience. At times, that picture may come with the news that the driver paid the truck off in far less time than the lease dictated, just because the market was strong enough, or that even if it took the full term, there was no balloon payment at the end of the three years.
But even if some success stories involve a driver paying off the loan, Aaberg stressed that is not the only outcome that is a win. “Is success a driver holding the title?” she asked. “The definition of success can be different.”
As an audience member noted, a driver can be in a three-year lease and choose to return the truck at the end of that term. The next choice would mirror what goes on with car owners: A lease is finished, the car is turned in and another lease is taken on for a new car.
Aaberg agreed with that particular outcome as one that can define success. Trucks today are complicated, “and ownership of that above 100,000 miles can become so difficult that it makes more sense to understand that it is a tool,” she said. When the mileage starts to pile up, along with the maintenance bills, “you might be better off trading up.”
Aaberg expressed concern that the current truck market is so strong and prices so healthy that in another two years a decline in used truck values could mean “a lot of people are going to be upside down.”
There were other pieces of advice that Aabert recommended for a successful lease. For example, escrow maintenance accounts should be maintained by the operator, eliminating questions about whether access to the accounts can easily be gained when the funds are needed.
If a carrier is able to implement a successful lease-purchase program, what are the advantages to it? Aaberg ticked off several: reduced capital costs, since the equipment will effectively be purchased by somebody else; reducing the administrative overhead of another employee and another owned vehicle; a reduction in recruiting costs if a lease is working during its duration and results in whatever ultimate success looks like. “A good lease-purchase program provides a career path for drivers and is a recruiting tool,” she said.
When the lessor sits down with the potential lessee, Aaberg said a cash flow model needs to be developed “that works for you and the lease-purchase operators.” One thing she has noticed is that increasingly, new lessors are looking at rates from the carriers in which they are getting paid a percentage of the load rather than a per-mile rate.
But overall, deals need to be crafted to be “sustainable,” Aaberg said. Looking at other operators who have reached a level of success can help build models for the next generation, she said.
Aaberg put a number on the minimum level of sustainability: $1,400 per week. If a driver on a lease-purchase plan is not making that after expenses, “then you are losing to your competition,” she said. She also noted that with rising costs and rising wages for fleet drivers, that number has moved up from $1,200 to $1,300 just two years ago. (She added that the figure is before Social Security payments.)
Aaberg expressed optimism that success can come for many lessee signings. “All failures come from lack of understanding,” she said. “There are individuals who could be helped through it.”
A lot of the challenge, Aaberg said, is “psychological.” The entity that offers the lease, whether it’s a third party or a carrier, needs to make sure that lessees know the challenges and get their buy-in. And she said they need to ask the question: “Does this person have the mental wherewithal to take what the trucking industry throws at them?”