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FLEET FUNDING: How to finance your fleet

Date: 20 May 2008

Cost is all again

We take a beginner's guide look at the pros and cons of three of the most popular methods of fleet funding. Tom Webster reports

When it comes to funding a fleet of cars, selecting which method is right for your company is one of the biggest decisions a fleet manager has to make. The cost to the business, the level of admin needed, and even a firm's share price can all be affected by that choice.

When considering the options available, there are many factors to take into account, and there might not be a definitive 'best option'.

It's not even a decision that can be based on fleet size. As accountancy giant Deloitte's fleet finance expert David Rawlings says, both large and small companies have similar concerns.

"A window cleaner has the same issues as someone with a fleet of several hundred vehicles," said Rawlings. "Both will want to consider the best use of their funds, what is most cost-effective and whether they want to take the risk on the vehicle."

Selection process

When it comes to setting up a fleet, Rawlings advises you select your cars before considering the funding method.

"Then start thinking about the whole-life cost of the vehicle," says Rawlings.

This whole-life cost will include issues such as CO2 and the taxation associated with it, end-of-use residual value and running costs such as servicing and maintenance.

CO2 emissions in particular will be worthy of even greater consideration due to changes to capital allowances announced in Alistair Darling's recent Budget, due to be enforced from April 2009. That's because the dividing line that defines the amount of money that can be offset against taxable profits will be set at 160g/km, rather than £12,000. (See box below: Capital allowances explained.)

A spokesman for leasing industry association the BVRLA believes the capital allowances alterations "will make contract hire of vehicles emitting less than 160g/km more attractive".

Colin Tourick, author of Managing Your Company Cars, says there are three key points to consider when deciding which funding method to choose.

1. Do you have the cash outright? If you are not simply buying a car, then you will be subject to interest rates that may well be higher than the interest your capital is earning. The cumulative cost of a large amount of cars may also prohibit the simple writing out of a cheque.

2. Do you want to take on the RV risk? Doing so means you can retain all proceeds from the eventual sale, but you are also in danger of selling a car for less than anticipated.

3. Do you want the hassle of trying to buy the cars? Researching and negotiating with car manufacturers can be time consuming and confusing.

With a large fleet, or for a manager who combines fleet management with other responsibilities, a package that combines maintenance might also be worth considering.

The monthly cost might be higher, but with all basic maintenance costs covered and organised, both the admin headache and one-off costs are reduced.

So with all these factors to consider, what are the options, and what are the respective pros and cons?