Finance options for fleets explained

Best Practice Guide: Leasing

Finance options for fleets explained

All fleets have different operating models, so no one funding method will fit all. Here’s a look at the different options available

At a GreenFleet roundtable last year, which had several fleets in attendance, the question came up over whether outright ownership or a lease model works best when it comes to financing vehicles. The answer was not definitive. Both ownership and leasing were practiced by the fleets around the table, and sometimes a mixture of owned and leased vehicles were included in one fleet. Norman Harding, corporate fleet manager at London Borough of Hackney said: “When we buy a vehicle, we don’t just look at what it does, we also look at the funding streams, we look at capital and leasing options and will make a judgement.” Healthcare provider Healthcare at Home meanwhile uses exclusively leased vehicles. The company’s fleet manager, Georgina Smith explained: “By leasing our vehicles, we know exactly what we spend on every year. We need all our money to invest, so leasing is perfect.” Michael Cook, senior fleet engineer at Babcock International Group highlighted that leasing is a good option when you don’t know where you are heading in terms of new technology and fuels, as you don’t get the residual risk.

Within Heathrow Airport’s fleet meanwhile, there is a mix of leased and bought vehicles, as explained by the airport’s procurement manager, Iqbal Gill. The conclusion was that all companies having different operating models so no one funding method will fit all. So what are the financing options open to fleets?

Contract hire

The BVRLA’s Vehicle Funding guide, done in partnership with Grant Thornton, says contract hire is the main type of vehicle leasing. Explaining the process, it says: “Contract hire sees a user hire a car for a set period of time and predetermined maximum mileage at fixed monthly rentals. There is no option for the hirer to purchase the vehicle and at the end of the contract, it is returned to the leasing company.”

Contract hire sees a user hire a car for a set period of time and pre-determined maximum mileage at fixed monthly rentals

The monthly rental rate takes into account registration fees, road fund licence, its period of use, agreed mileage, funding costs, and forecast residual value, as well as the cost of the car. The number of miles a car does has major implications for both its service requirements and resale value and so will have an impact on the rental rate. The monthly fee may include a ‘service’ element covering additional services, such as maintenance, replacement vehicles, roadside assistance, motor insurance, accident management and fuel cards.

Finance lease The BVRLA / Grant Thornton guide explains a finance lease as allowing the lessee to hire a vehicle for a fixed monthly fee, with the vehicle remaining the property of the leasing company. This is similar to contract hire, however, the vehicle will appear on the lessee’s balance sheet, with outstanding rentals represented as a liability because the risks and rewards of ownershiprest with the lessee.

The guide says: “A finance lease generally conforms to one of two standard formats: a lease with a final balloon payment (smaller monthly payments with a final big payment at the end), or the fully amortised lease, in which the finance is spread over a fixed period with the same amount being paid on a regular basis, usually monthly.

“In a lease with a final balloon payment, the overall depreciation of the vehicle is reflected in the monthly rental, with the final payment covering the original estimated residual value at the end of the contract. If the vehicle is subsequently sold at a price above that of the predetermined balloon payment, the leasing company will refund a percentage of the proceeds to the lessee. If the price is below the balloon payment, the lessee will be liable to pay the shortfall to the leasing company.”

Contract purchase

Contract purchase sees a customer agree to purchase a vehicle via a series of monthly instalments, the BVRLA guide says. Ownership passes to the purchaser at the outset or the end of the contract, depending on whether a conditional sale or credit sale agreement is used. Hire purchase meanwhile is a type of agreement where the purchaser in effect takes out a loan to buy vehicles from a third party. The agreement may require a three or six month deposit at the outset and usually terminates with a balloon payment – typically equivalent to the expected residual value of the car. Both the deposit and the balloon payment can be varied to reduce or increase the monthly repayment amount. “This type of funding appeals to companies that want to retain ownership of their vehicles, do not want to use their capital or overdraft to pay for them, and want to avoid mileage restrictions,” the guide says. However, it presents a residual value risk and requires inhouse expertise and management resources.

Outright ownership

Purchasing a vehicle outright is regarded as an acquisition of a fixed asset for accounting purposes. As such, the vehicles are recorded on the organisation’s balance sheet and depreciate over their useful life down to an estimated residual value. This gives the greatest level of control over how a vehicle is procured and also provides a potential influx of funds when vehicles are sold. But that does mean tying up capital in a rapidly depreciating asset, the guide says.

Zero emission vehicles

The government’s Road to Zero strategy made clear that it wants to pursue a zero-emission

transport future. But for many, there are still too many concerns that electric vehicles will not be fit for purpose in fleet operations. Leasing and rental, over outright purchase, can help lessen these concerns and allow fleet operators to try the vehicles without the risk. Explaining the benefits of leasing electric vehicles, the BVRLA’s Gerry Keaney said: “Many of the long-standing benefits associated with vehicle leasing are particularly attractive when it comes to fleets and people looking to adopt zero or ultra-low emission vehicles. “These vehicles are expensive and leasing companies can pass on the purchasing discounts they get from buying so many of them. Leasing enables you to fix the cost of your vehicle acquisition over a set period, meaning that you don’t have to stump up a lot of money up-front. “This can be particularly attractive for businesses that would like to use that working capital elsewhere. With the most popular form of leasing, contract hire, you never actually own the vehicle. This means that you are immune from any risk associated with that vehicle’s residual value. Should a vehicle’s residual value fall sharply, perhaps due to the introduction of a new range of much more efficient electric vehicles, the leasing company will have to absorb this cost.”

Compliance with Clean Air Zones

With the imminent arrival of Clean Air Zones around the UK, leasing may also provide an attractive way to use compliant vehicles. The leasing sector is already leading the way for compliant vehicles, according to the BVRLA’s recent ‘Fleet Sustainability Credentials’. It says that ninety-four per cent of the car rental fleet and 75 per cent of leased cars are CAZ compliant. These compliance figures are well ahead of the average for all UK cars, where only 57 per cent meet CAZ emission requirements. With regards to vans, only 13 per cent of the UK van fleet is currently CAZcompliant, compared to over a third (37 per cent) of all leased vans and over half (56 per cent) of the rental van fleet.

See the BVRLA / Grant Thornton guide on Vehicle Funding at tinyurl.com/yd5bverm.

FURTHER INFORMATION:

www.bvrla.co.uk

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