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The start point for the best source of fleet information

FLEET FUNDING: 10 vehicle funding questions (continued)

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

6. Is there a market for lease or hire purchase?

Yes. Both products are forms of deferred purchase, so for companies who can't recover VAT, purchase options are often the best route. Spreading the cost over time (deferred purchase) helps the cash flow of the business.

Hire puchase is a simple way to spread the cost of buying a new car with a fixed rate of finance and a fixed monthly payment, with the payment also dependent on the period and initial deposit paid. Lease purchase is a variation on this with a balloon payment at the end of the contract, resulting in lower monthly payments than a normal HP agreement, explains Yates.

These forms of financing can be flexible, for example, with fixed/variable interest rates, higher initial deposit and final balloon payments, and if companies want to own the car at the end of the contract they can, provided all the terms and conditions of purchase are fulfilled.

Yates adds: "With no VAT paid on monthly payments, it is generally more suited to companies that are not VAT registered."

7. How does maintenance fit into the various options?

Users can choose to organise their own maintenance, or outsource fleet management to an operation either as part of, or separate to the main vehicle agreement. If firms outsource maintenance, they can pay a fixed amount per month or pay for each service as it arises.

This is the case at Lex Autolease, but Coley says if a vehicle is low mileage and reliable then it is better to avoid a set plan.

However, the majority of businesses have a maintenance package as part of the lease because of the peace of mind involved, he adds.

8. What mistakes do fleets make?

Many companies do not understand how much their fleet actually costs, says Coley: "If you don't know what your costs are, how can you improve it and how can you reduce it?

"Our first point of call is asking firms to consider the total cost of their fleet including finance, SMR, tax, fuel and insurance."

Fleets put too much focus on headline lease rate and not enough focus on secondary costs such as termination and extension and tertiary costs like glass, breakdown and telematics, adds Larkman. (See table above, 'Top five mistakes fleets make with their funding'.)

9. Are fleets taking up sale-and-leaseback options?

More and more companies are recognising the need to free up capital, improve cash flow and reduce risk, so an increasing number are looking at sale and leaseback says Yates.

Sale and leaseback is also a seamless way to transfer vehicle ownership as vehicles are kept on the road without disrupting drivers.

Rawlings agrees, saying it is a good way of getting a poorly managed fleet onto a good footing as well as releasing valuable capital back into the business.

"However, when credit is difficult to obtain, companies offering sale and leaseback on acceptable terms can be very difficult to find," he adds.

Yates says ALD Automotive has to be confident that a customer is financially sound and not looking to sell vehicles to raise cash after being refused credit by its usual lender before entering into a sale and leaseback deal.

"We have to be certain there are no underlying issues with their business and long-term future," he says.

10. What changes can we expect in the next few years?

With the Government in huge debt, Tourick expects car taxation to increase. Rawlings agrees that the Government will continue to use taxation as a way of influencing behaviour.

Special offers from manufacturers will start to increase again, too, as will output.

But while the fleet industry picks up, Tourick expects car dealers to struggle more and more, meaning it will make financial sense for business car drivers to run service, maintenance and repair through leasing companies. Generally, more people will outsource the running of their fleets to other companies, he thinks.

The use of technology in business will reduce the number of cars that are needed overall. But where cars are used, they will decrease in size as businesses look for savings, with fleets being an easy area to cut costs.

In a further bid to save money, driving for work will become more closely monitored, adds Rawlings.

Salary sacrifice schemes are on the up, according to Tourick, but ECOs won't become popular with many organisations having found them "hard work".