Fleet News

Fleet funding: What a difference a year makes in leasing

ANY fleet using contract hire will have at some point come to a decision on the length of time that contracts should run.

The number defleeting their vehicles at three years and four years are pretty evenly matched at present – but which option is the best route to take?

Fleet managers must take into consideration both the employee and their employer when choosing a contract hire cycle, according to Clive Forsythe, sales and marketing director at Masterlease.

He said: ‘From a technical perspective, there is very little difference between a three or four year funding contract, as they both operate in much the same way.

For the contract hire company, a four-year contract brings some added complexity, for example MoT test management, but that’s not going to influence a customer’s choice.

‘The route companies opt for depends on whether they approach the subject from an employee benefits or an expenditure point of view. In short, three years favours the employee while four years could be better for the finance director.’

Having a contract which lasts longer also means that businesses may find it easier to budget and plan ahead as the costs are fixed across a longer time frame.

However, Elliot Woodhead, head of product development at Arval, says it is important that fleet managers collaborate with other company departments before implementing any changes. He explained: ‘Unfortunately, there is no ‘off-the-shelf’ guide available which miraculously plots this timeframe and managers must make this decision on an individual basis, by addressing the operational and HR issues that are unique to their company.

‘Critically, this decision should be made in conjunction with the company’s fleet manager, HR, finance and operational representatives and fleet management service provider. The assembled team needs to consider the advantages and disadvantages of longer term business.’

Fleet NewsNet takes a look at some of the areas fleet managers should study before deciding on a contract term.

Human resources

IT is important to liaise with the HR department when changing from a three to four-year cycle as any backlash, whether from individual drivers or suppliers, will ultimately filter back to HR. Opting for a four-year cycle could save the company money in the long run, but may not be worth the repercussions from drivers.

Large companies often opt for the shorter cycle of the two in a bid to keep employees on side and also to act as a tempting incentive on benefits packages for new recruits. Woodhead said: ‘Within the company’s business sector, company cars maybe integral to attracting and retaining the right calibre of staff. If this is the case, a four-year deal is probably not the answer.’

Fuel <P> ACCORDING to Arval, a major factor for the contract cycle has been the continued rise of diesel fleet sales which, according to the SMMT, now account for 36% of the UK fleet market.

Woodhead said: ‘It is common for many diesel-engined vehicles to be offered on four- year contract hire deals with agreed mileages over the term, typically set at around 80,000 miles. Today, when looking at longer term contracts there are clear benefits to running diesel models in terms of fuel economy and residual value performance.’

Drivers P> DRIVERS’ needs play a key part in the decision on contract hire cycles and often drivers say they do not want to keep the same vehicle for more than three years.

Alastair Kendrick, tax partner at Wilder Co, said: ‘On paper it is worthwhile moving to a four-year route from three year.

‘However, it impacts on the employee community and will take a lot of selling. Drivers get tired of their cars and if they are told they’ve got to keep them for another year, some won’t be happy.’

Giving drivers the chance to opt for a new model after three years can boost morale. Forsythe explained: ‘It is likely that drivers will prefer to have a new car more often. A three-year replacement cycle could help staff retention and recruitment as, with two plates changes per year some cars can easily look outdated.’

Residual values

RELATIVELY low trade demand for four-year-plus, high-mileage vehicles could show reluctance from buyers to take on the higher risks associated with cars that are likely to be out of their manufacturer-backed warranty.

It means companies defleeting four-year-old cars could face disproportionately higher depreciation than those trading in three-year-old models. However, Jeff Knight, forecast manager at CAP Monitor, believes that as long as values have been set at the beginning of a contract then fleets shouldn’t have anything to worry about.

He said: ‘Positions are set at the start of a contract so if companies have done their sums right it shouldn’t really make a huge difference.’

Mileage

OBVIOUSLY high-mileage drivers would prefer to change vehicles as often as possible, and as far as mileage goes there are health and safety issues which would have to be addressed if fleets are keeping vehicles on longer cycles. Fleet managers should assess each driver on his/her own merits and monitor mileage patterns regularly to help decide on contract length.

Kendrick said: ‘Fleet managers need to be aware of the risk of extending the cycle especially for high-mileage drivers, they need to ask whether this is sensible from a health and safety point of view.’

High-mileage vehicles face the risk of lower residual values, warranty issues and maintenance problems.

Costs <P> A FOUR-year cycle may be beneficial from a financial point of view especially as there would be a reduction on the monthly rental compared to a three-year contract.

Contract hire companies tend to offer a reduced monthly rate the longer the term is applied.

However, those opting for a three-year route must be certain they won’t actually require the vehicle for four years as adding an additional year at the end of the contract could prove to be an expensive decision.

Knight said: ‘It is profitable for contract hire or leasing companies to offer a three-year term and then extend the contract for an additional year at the same rate. Opting for a four-year route will ensure lower monthly payments.’

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