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FLEET FUNDING: 10 vehicle funding questions

Date: 16 March 2010

BusinessCar's focus on the different sectors of the fleet industry this time looks at vehicle funding, and answers 10 key questions to help better understand the options for financing fleets. Rachel Burgess reports

1. What serious options are there for vehicle funding?

There is an array of options including buying outright, contract hire, contract purchase, finance lease, hire purchase, lease purchase, ECOs and salary sacrifice schemes.

But if you consider the "exotic schemes" says Paulo Larkman, head of Fleet Consultancy Services at finance providers Lombard, most businesses, especially smaller ones, don't have the fleet dynamics to warrant such a product. "And the cost of implementing and servicing could negate any financial benefits, so you're left with a simple choice: you buy the asset or you borrow it."

David Rawlings, from fleet finance expert Business Car Finance, says that to make the best decision for vehicle funding, the customer must consider the cash flow implications of each product, the tax effects (both direct tax and VAT) and their appetite for risk.

2. What are the advantages of buying outright?

Companies that outright purchase their fleet cars have complete control on when to buy or sell them, meaning a flexibility largely absent from the leasing arena.

If you have the cash to buy your vehicles, then it makes sense, says Paul Coley, associate director of Lex Autolease's consultancy services. This all depends if you can acquire cash at a better rate than the interest charged by contract hire.

But then you have the problem of selling the car, rather than simply handing it back to a leasing company, adds Coley: "You could take a big hit in a very volatile market."

Firms also need to consider the operational costs when buying outright.

3. What are the advantages of leasing?

Major changes to VAT legislation, introduced in August 1995, means companies using cars solely for business purposes can recover the VAT incurred. As leasing and contract hire companies only use the cars they lease for business purposes, they can recover the VAT and in turn reduce their contract rentals.

Two factors offset this saving, explains Rawlings: "Lessors have to account for the VAT when they sell the cars and lessees can only recover half the VAT that had previously been recoverable on the rental.

"This leads to leasing being significantly more attractive than purchase from a VAT point of view."

When a company funds the purchase itself, it has to add the finance debt to the balance sheet, and it takes on the residual risk as well as buying, running and selling costs.

Lombard's Larkman says this is the "raison d'etre of leasing companies - they leverage the economies of scale in these areas in order to make leasing, or outsourcing, attractive from a cost perspective".

And Coley adds that there is extra benefit of account management. This not only includes packages built-in, but also fleet expertise often lacking within companies.

4. How has the recession changed vehicle funding?

Businesses started to extend contracts as money was hard to come by. This also suited leasing companies at the time because used car prices briefly plummeted.

Prior to the recession, fleets were seen as an employee benefit, but now they are a necessary evil, says Coley.

"Companies are looking at reducing manufacturer partners, increasing discounts and reducing costs. It is seen as a tool rather than a benefit."

Businesses are also looking at minimising CO2 to cut fleet costs rather than for environmental concern and generally looking at fleets with a "fine-toothed comb" to keep it leaner, he adds.

The recession has also caused a knee-jerk reaction among lenders, who restricted credit lines and tightened terms.

Business car finance expert Colin Tourick says the credit crunch has meant "almost total elimination of funding for companies that are on the borderline of credit worthiness" due to the pull out of sub-prime finance from the market.

"It has been a devastating fallout for the big leasing players who haven't had the funds to advance," adds Tourick.

Sale-and-leaseback deals (see question 9) are also likely to continue growing post-recession, as firms look to release cash and provide financial certainly, says Larkman.

5. What is a finance lease on vehicles?

There are two main types of finance lease - where the lessee pays the entire cost of the vehicle, including the interest charges over the agreed period, or where the lessee can opt to pay a lower monthly payment with a final balloon payment based on the anticipated future value of the vehicle.

In the second type the user bears the risk should the sale value of the vehicle not match the final balloon payment agreed at the start of the lease, according to ALD Automotive marketing manager David Yates.

The resale value may not be sufficient to pay off the outstanding finance balance.

Finance leases are better suited to those who wish to take the risk of ownership as well as all administrative and operating risks too; with a finance lease, the risks are effectively re-assigned to the lessee as if they had bought the vehicle outright. ?

Companies that opt for finance leases usually want to accept the risk of ownership, while having the VAT benefits associated with leasing, says Rawlings.

CONTINUED ON PAGE 2...



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