Thursday, March 17, 2011

Lease Purchase - A Black Eye on The Trucking Industry

To illustrate the shame otherwise known as the truck lease purchase business, let’s use a different illustration:

1.)Let’s say your boss offers to sell you the PC on your desk.

2.)Let’s further say that the boss arbitrarily assigns a purchase price to
that PC of $500 more than it’s worth.

3.)Finally let’s say the boss insists on the following stipulations:

a.You must pay for the PC via monthly payments over the next three years.
b.You must restrict your use of the PC to company business.
c.You must maintain the PC at your expense.
d.You must purchase insurance on the PC and further name the boss as an additional insured under your policy.
e.If you miss a payment regardless of how many you’ve previously made, ownership of the PC reverts back to the boss.

Assuming you accept the terms, you then become the proud owner of the bosses’ former PC. Now let’s examine what he gets in the bargain:

1.)He has transferred a formerly depreciable asset off his books and onto yours. All future depreciation and the aforementioned maintenance now falls to you.

2.)He has booked an immediate $500 profit for an asset that would normally have little if any residual value.

3.)Having sold you the tools of the trade, he now feels secure in re-classifying you as an independent contractor rather than an employee. By extension all previously paid employment taxes and benefit costs shall henceforth come out of your pocket not his.

4.)Oh yeah. Let’s not forget the immeasurable satisfaction he earns in having helped a poor credit unworthy soul like you become a member of the asset owning class. If not for his generosity, what chance would you have? Besides that PC was starting to make a strange noise.

But wait there’s more. Let’s say three months later a co-worker accidentally spills coffee on your PC. It fries the circuitry and renders the whole damn (funny how that adjective often accompanies asset ownership) machine worthless: a total loss if you will. For the boss such misfortune translates into a cash flow win fall. The insurance you purchased pays him off - lump sum - 33 months ahead of schedule. This in turn sets the stage for the boss to sell you another overpriced PC thereby starting the cycle all over again.

Now 25 payments into your second deal the economy begins to slow. The money you previously raked in as an independent computer operator dries up. Eventually you miss an installment. This unforeseen circumstance triggers forfeiture. You lose all your previous payments. You lose your PC. You have nothing in the bank and nothing on your desk. You’ll have to seek a new livelihood. But of course you have only yourself to blame. You should have understood the rules of the game before you took the plunge. Meanwhile the boss sells your PC to the next easy target for $500 more than it’s worth.

Obviously no office worker in his or her right mind would entertain such a deal, which certainty begs the question: why do so many truckers? Lease purchase in trucking has become as common as diesel fuel. Even the smallest of trucking companies have slithered into the act. A Google search on the phrase “Truck Lease Purchase” turns up over 544,000 results.

I understand the allure for trucking companies. Pawning used tractors for $10,000 over resale makes for attractive economics. Churn out enough of these deals - ala the big boys - and the money really piles up. In fact I have begun to suspect that moving freight for a lot of large trucking companies serves only to facilitate their seemingly real business of selling overpriced used trucks to inexperienced drivers.

When it comes to favorable outcomes few business models can beat truck lease purchase. If a contract actually plays out, the trucking company books a huge gain. If a lease purchase truck is wrecked mid-contract, the trucking company books a huge gain plus an immediate cash payment via insurance. And in the best of all worlds – default - the trucking company books a gain on forfeited lease payments, then books an additional gain by re-selling the repossessed truck to the next victim. Talk about turning lemons into lemonade. What other industry has figured how to profit so handsomely from a combination of poor credit, accidents and forfeitures?

But it takes two to tango. Drivers don’t enter these deals at gunpoint. So what gives? I suspect it has something to do with DNA. Beneath the cautious if not at times cynical veneer, most drivers actually seem predisposed toward optimism, freedom, and faith in the American economy. By extension this mindset makes them more entrepreneurially inclined than say the average cube based office worker. Lease purchase plays to the mindset well. It makes the American dream tangible. Your truck is parked right there. Just sign. (Don’t worry it’s all boiler plate language – No we won’t do a credit check). What easier route to professional independence and riches?

Unfortunately, the combination of big dreams, poor credit and fine print rarely yields a pleasant outcome. I won’t deny a profusion of lease purchase success stories. A few trucking companies actually have workable programs. Still way too many of these deals fail, and when they do only one side loses. That some of the most admired trucking companies in the country have come to embrace a scheme that would make the average payday lender blush seems… well sad. I look at some of those industry leaders wandering about the TCA annual meeting this week and can’t help but reflect; could you possibly bank your fortune without preying on the inexpert? Maybe trucking should direct more of its focus toward driver education as opposed to exploitation?

In the meantime, for anyone set on becoming an owner operator; all the power to you. Just make sure you understand the business. Also I suggest you consider purchasing a well conditioned used truck from a respectable dealer. Put no less than 25% down. Maybe purchase a maintenance warranty. If you find you can’t swing the deal, do not get discouraged. Take it as a sign that you probably shouldn’t own a truck quite yet.

Of course that makes you a perfect candidate for lease purchase.

Thanks for checking in…