FLEET FUNDING: How to finance your fleet (continued)
20 May 2008
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
1. Outright purchase
Simply, the company buys the vehicle with its operating capital. This is traditionally one of the most common method of business acquisition.
For: The car can be placed on a balance sheet as an asset; Company has complete control of when to sell; All proceeds of the sale can be kept; A close relationship can be built up with the local dealer.
Against: Company holds the RV risk: Unless the fleet is large, the discounts available will not be as attractive as those enjoyed by leasing companies; Purchase process is time consuming; Cars offer no direct financial return as assets, so overall share price can be affected; May tie up working capital needed for daily business.
2. Contract hire
With more than a million cars on contract hire agreements, this remains the most popular method of leasing.
For: Leasing company takes the RV risk - if the car sells for less than expected then only they lose out; Proposed new tax changes make it more attractive as an option; Timing is flexible, with schemes running from 12 months to five years according to business needs; Maintenance can be included in the deal, reducing potential outgoings and admin; Agreements are generally on a fixed rate and not affected by a volatile financial market; Big leasing companies can get big discounts from manufacturers; An ongoing relationship can lead to lower rates; A deal can be terminated early.
Against: .but early termination can be problematic - agree any potential cancellation costs before signing a contract; Unusual or exotic cars are not normally available; Can be charged for excess mileage; Cars must be returned in a fair state with any damage made good; Lack of control over time periods involved and the car itself - aftermarket accessories are generally prohibited.
3. Contract purchase
Launched due to the tax disallowance on expensive cars, contract purchase combines three agreements in one: a conditional sale with a lump-sum end-of-contract payment, plus repurchase and maintenance agreements.
For: As the agreement is one with a commitment to a purchase, no VAT is payable on the installments; The maintenance agreement is separate so VAT can be reclaimed on these payments; Vehicles can be kept or just handed back at the end of the agreement.
Against: As the agreement is a conditional sale, the car must be declared as an asset on company books; Monthly payments are higher as a result of maintenance being included.
"In the business world overall, the most popular funding method is contract hire," says Colin Tourick, and it would seem the changes to the capital allowances system outlined in the Budget is going to further enforce this.
"Before, if you were going to get a car for less than about £22,000 then contract hire was the best option," says Tourick. "If it cost more than that then you would be better off buying it."
"Now it is looking like contract hire works as the preferred option right up to £50,000 so long as the car doesn't have a high CO2 rating."
To work out what's best for your company, it is advisable contacting a leasing firm as they will have the means to evaluate the most suitable method of funding.
Marc Sinclair, director of leasing company Alphabet, said: "Most decisions are based on the monthly lease rate and how big a discount can be got from a manufacturer.
"[But] A car with a higher lease rate may end up being cheaper overall due to the CO2 rating. It is possible for managers to get more desirable cars on their fleet, save money and improve their carbon footprint.
"It can be a complex equation, but if they go to a leasing firm they should be able to come up with a cheaper, greener and more desirable solution."