Biz Flash: What to Know Before Starting a Car Rental Business
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“We get a lot of calls from entrepreneurs who want to start a car rental business. They think it’s a sexy business, but in reality, it is a lot of hard work and risk.”
Neil Abrams, President of Abrams Consulting Group (A Leading Consultancy for Auto Rental Operators and Systems)
Car rentals are a popular choice for a wide variety of situations. Whether for business trips, leisure travel, or testing out different vehicle models, renting a car provides a convenient and cost-effective solution that often beats relying on public transportation or ride-sharing services. Beyond the freedom to explore new destinations independently, renting a car can be a temporary solution while personal vehicles are being serviced or repaired.
The car rental market in the US was estimated to be $98.14 billion in 2020, with a projected compounding growth of 4.6 percent from 2021 to 2028. With such good growth prospects, starting a car rental business can seem lucrative. “We get a lot of calls from entrepreneurs who want to start a car rental business. They think it’s a sexy business, but in reality, it is a lot of hard work and risk. If you don’t have that risk appetite, this is not the business for you. Having said that, it’s an exciting and fun business, and you can make a lot of money if you know what you’re doing,” says Neil Abrams, president of Abrams Consulting Group, a leading consultancy for auto rental operators and systems across the U.S. and Canada.
Despite the car rental’s large market share, a few companies generate most of that revenue: “This is an industry controlled domestically by three companies: Hertz, Avis, and Enterprise. Collectively they corner 95 percent of the domestic rental market. Whatever market share is left is divided among hundreds of independent rental companies and startups,” explains Abrams.
While the car rental industry may seem profitable for entrepreneurs, it is essential to understand the risks and challenges involved. Learn Abrams’ top considerations when considering a car rental business.
Meet the Expert: Neil Abrams
Neil Abrams, founder of Abrams Consulting Group, Inc. (ACG), is a seasoned industry expert with nearly four decades of experience in car rental consulting and travel market research. A former Hertz Corporation executive, Abrams established ACG in 1982, which has since become a leading consultancy for auto rental operators and systems across the U.S. and Canada.
With a focus on business development, strategic planning, and organizational development, Abram’s expertise spans management controls, operations analysis, revenue maximization, and market research services. Under his leadership, ACG has expanded globally through its subsidiaries, cementing its position as an industry leader.
Car Rental Businesses: What You Need to Know
With over 40 years of experience in car rental business consulting, Abrams offers valuable advice for prospective car rental business owners. He encourages them to consider the following factors carefully:
The Business Cycle
While many traditional business concepts and practices apply to the car rental business, this industry has unique aspects: “Do you understand the various cycles of this business?” asks Abrams. “For example, buying and selling cars is a critical piece of the puzzle, not just renting cars. An essential part of the business is the disposal of the vehicle. We call this the asset management part of the business.”
Abrams likens the buying and selling of cars to real estate, but rather than having an appreciating asset, you have a depreciating one. So it is critical to know when to sell vehicles for the highest return, when to buy cars, and which ones to purchase.
One of the best ways to be successful with a new car rental company is to rely on the advice of someone who has done it before. Hiring a consulting firm, like Abrams’, can help entrepreneurs skip many of the mistakes made while starting a business in this field: “You need guidance if you don’t have experience in this business. You need advice on how you construct the company, develop a business plan, read a performance, develop a marketing plan, get insured, and how you take it all to market,” says Abrams.
Starting a car rental business requires a lot of cash or access to cash. “One of the first questions I ask is do you have money? You might think that’s a silly question, but this is a capital-intensive business. An average car today is north of $35,000 to $40,000. If you start your rental company with ten cars, that’s maybe half a million dollars,” explains Abrams. “Sure, you can secure financing, but any credit source is going to ask, especially a startup, to put down initial equity as a down payment on the loan.”
Securing financing for ten cars may be possible, but Abrams believes that, in reality, you need a significantly larger fleet: “I use the example of ten cars because I get a few calls from individuals who want to start a company with ten cars every year. I tell them, ‘Don’t waste your time. You can’t make enough money with ten cars, and it’s not worth the risk, especially if you have no experience in the business,’” says Abrams.
Have A Differentiator
Car rental businesses outside the large commercial operators need to set themselves apart from the competition. “You have to have a differentiator, meaning what will make you different from everybody else? These differences among the independent operators can be found in several places,” says Abrams.
“For example, it could be the type of vehicle. We’ve had clients that are exclusively luxury vehicles, even super luxury vehicles like Ferraris and Lamborghinis,” he continues. Another place car rental businesses can set themselves apart is their marketing. “We had a client that was just treading water in Massachusetts. They were just an average rental company competing with Hertz, Enterprise, and Avis. We asked them what was unique about their market and their customers. It turns out that they have a large gay community in this part of Massachusetts, so with them on how to target their brand and marketing message to the gay community. And this business just blew up.”
One word of caution is not to use price as the differentiator. It is a race to the bottom. “You need to be creative and think outside the box. We have had some people say, ‘We’re going to be the most deeply discounted rental company. That’s our niche.’ That may work for a while, but it’s not a long-term strategy. Soon everybody will reduce their prices to match you and eventually drive you out of business. Then they’ll raise their prices again,” warns Abrams.
Insurance for car rentals is more complicated than personal car insurance, and it is not always easy to secure: “As a startup, it’s hard to get rental car insurance. Insurance underwriters don’t want to take on the risk of a company that has never rented one car. You’ve got to establish credibility and validate your trustworthiness,” explains Abrams. “If you have a mentor in the industry or hire a firm like ours, it can help bring that validity. It tells the insurance company that you mean business. They will vet potential net worth, prior business history, and any prior claims against the company or the individuals.”
In addition to the insurance that covers rental cars, typically called fleet insurance, a car rental business will need general liability insurance, excess liability insurance, commercial property insurance, and workers’ compensation insurance.
Consider a Franchise
For some entrepreneurs, a franchise from one of the big car rental companies might be a good option rather than starting from scratch: “The major rental companies will offer franchise operations, typically small markets, where it doesn’t pay to open corporately. They do provide guidance and training to some extent. They don’t necessarily finance you or provide the insurance, but it can make the process much easier,” says Abrams.
The other benefit of being a franchise is integrating already existing systems. “If you want to start a business at the airport, you need a reservation system and your own code, much like an air airline code used in the reservation systems. It’s very expensive for someone to go out and get their own code. It is a prohibitive barrier to entry for many startups,” he says. This code then allows the franchisee to be part of a global reservation system that can help facilitate business and will enable them to work at an airport.
A robust technology supporting the business is critical for any new car rental business: “We’ve seen people try to do it with paper rental forms, and it’s a disaster for many reasons. One reason is every state has its own business terms and conditions for ground transportation companies, and you’ve got to be registered as a business and follow their reporting requirements. It’s a lot,” says Abrams.
He continues, “You need software that manages your reservation, delivery, accounting, administration, customer profiles, and most importantly, your fleet. Fleet systems let you know the status of every vehicle at every moment of the day. Is it in your lot? Is it in service? Is it sitting in an airport? When is it ready for preventive maintenance? Manufacturers require fleet operators to maintain their vehicles, or they go out of warranty,”