Insight: Van funding - fleets switch from outright purchase to contract hire

Cash is king, goes the saying, and for many years this was the dominant way for fleets to acquire new vans.

However, the recession has put a different slant on the phrase. Companies found that retaining cash as working capital to invest in their core business was more beneficial to them.

This helped steer them toward acquiring vans through contract hire; so much so that it has now become the main funding method among large fleets.

Sewells Research and Insight data shows that in 2010, 35% of companies in the Fleet 200 – the Fleet News listing of 200 of the country’s largest fleets – used contract hire as their main form of funding commercial vehicles, compared with 43% for outright purchase.

However, last year’s figures report that contract hire was the main form for 49% of the fleets, while outright purchase had fallen to 37%.

The main reasons for the shift are simple, says David Rawlings, director of BCF Wessex Consultants: the desire of companies to retain cash to invest in their businesses and the improvement in products offered by leasing companies.

“Traditionally, companies thought they needed a lot of flexibility with their vans over issues such as how long they kept a vehicle for and what they did with it, so it was just easier to pay cash,” he says.

“But we are now eight years since the beginning of the recession and a lot of businesses are waking up to the fact that cash retained is king and that there are some very good contract hire and leasing deals for vans. If fleets work well with their leasing company they can still keep that flexibility, getting all they want and probably more without the expense of that cash drain on their working capital.”

He says leasing companies are now offering products with a greater degree of sophistication: “It’s more of a partnership arrangement than what used to be a ‘pile them high and sell them cheap’ arrangement. The leasing companies are making sure the vans are very much fit for use, that they are maintained, safe and fitted out inside, that the drivers are going to like them, they are fuel efficient and technology, like tracking, can be easily fitted. It’s become a one-stop shop for keeping what is probably the most important part of your business going.”

Other benefits of leasing over outright purchase include fixed monthly expenditure, with maintenance included, access to fleet professionals, management data and fleet administration, according to Mark Lovett, head of commercial vehicles at LeasePlan.

“Many clients are now not employing specialist fleet managers,” he adds. “Instead, they are looking for alternative funding options, with management support, to provide all fleet requirements in one place and one monthly invoice.”

LeasePlan’s experience of growing the number of fleets leasing commercial vehicles, instead of buying them, reflects the trends found by the Sewells research.

“We’ve witnessed a steady increase in demand for alternative funding for commercial vehicles and a perceptible move away from outright purchase,” says Lovett. “For many years, companies looking for leasing would often consider contract hire for their cars but keep the vans on outright purchase.

“This increase has come about primarily because of ever-growing demands on businesses’ cashflow, but it is also a result of companies choosing to outsource the specialist knowledge required to best run a commercial vehicle fleet.

“When cashflow is limited, businesses can ill afford to spend money in areas where financing is an option.”

“Leasing provides the ability to make payments over a longer period of time, without a direct impact on a business’s lending position.”

Lovett says the availability of one-stop solutions with all the management reporting in place is attractive to all businesses – large and small. “The benefit of outsourcing this element of their day-to-day business is that it allows them to get on with what they are good at,” he adds.

“There is no particular type of business that is switching to leasing. The reality is leasing can be a great option whatever the size of your business and whatever sector you operate in. Even the self-employed business owner may need to have a vehicle ready every day.

“Choosing to lease that vehicle means the business always knows what the monthly cost will be and is never at risk of having an expensive month if something goes wrong.

“Increasingly, business owners are recognising the advantage of knowing exactly what they will have to pay each month as well as having a vehicle that is fit for the job they need it to do.”

There are also further advantages, according to leasing companies, particularly if a company does not have in-house expertise.

“By taking a fully outsourced solution, businesses can reduce administration and get cost efficiencies through a leasing company’s buying power and management expertise,” says Ian Hughes, commercial director at Zenith.

“If the LCVs require a fit out (racking, livery etc.), the leasing company can manage this process with the different suppliers involved to reduce vehicle off-road time and deliver the vehicle to the customer ready to use.”

Traditionally, one concern which may have deterred fleets from leasing vans was the possibility of incurring substantial damage recharges when vehicles are returned at end-of-contract. However, this is an issue being tackled by leasing companies. For example, Ogilvie Fleet says it has virtually eliminated customers questioning end-of-contract damage charges on leased vehicles.

It introduced a ‘transparency policy’ in respect of damage charges, by telling customers what they would be at the outset of the contract. They sign up to this recharge cost matrix in their master hire agreement.

These charges to return a van to the BVRLA’s fair wear and tear guidelines include £75 for door panels and front wings, £120 for side sliding doors, large side panels or bonnet, tailgate and bumpers, and £250 for a roof.

Jim Hannah, operations director at Ogilvie Fleet, says: “End-of-contract charges can be viewed as a sting in the tail by fleet managers.

They consider that they have paid the contract for the full period and don’t want to make any further payments when they return their vehicle. “Our policy of making end-of-contract charges clear in the initial agreement makes any cost transparent to customers. Consequently they are more accepting of any damage charge if one arises.”

In the event of a charge, Ogilvie Fleet sends the vehicle appraisal document and appropriate photographs to the fleet manager. Last year, where a cost was incurred by a fleet it was accepted in 98% of cases, and in the remaining 2% – amounting to around four or five vehicles a month – Ogilvie Fleet discusses the damage charge with customers and agrees a fee acceptable to both parties.

That compares with a query/rejection rate of 44% prior to introduction of the transparency policy a decade ago.

A recent Fleet News online poll found that 20% of respondents had either recently or were now considering switching from outright purchase to lease, while 50% had not or we not thinking about the change. However, 23% said they had either switched from contract hire to outright purchase or were considering it.

So, given this mixed response, will the move towards leasing continue? Yes, says Rawlings: “I think we will see more vans being leased.

“There will be a point when it reaches mass and stops growing. But while businesses need to retain cash, contract hire opens their eyes to see what the benefits are.

“They then suddenly realise that leasing vehicles is not just about funding.”