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Fleet Funding: Can pick and mix be the solution?

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Fleet funding choices are becoming more varied.

It’s no longer a matter of simply choosing between outright purchase and leasing.

Now fleets can choose from a range of options to suit their needs.

Outright purchase

Outright purchase of vehicles is still a popular option, particularly with smaller fleets.

But a growing number of fleet operators are starting to think twice about taking this route.

Although outright purchase adds to a company’s balance sheet, there are drawbacks.

For a start, a large amount of cash is required.

Added to that is the residual value risk which has to be taken on the vehicles purchased.

Fleet managers need to bear in mind that residual values are at their lowest level for many years.

Sale and leaseback

With this option, a company enters into an agreement whereby its owned vehicles are valued and bought by a supplier, and then leased back.

One firm that owned part of its fleet recently sold 200 company cars to a vehicle management group on a sale and leaseback basis with 130 contract hire vehicles also being gradually replaced on the same basis.

Jim Glover, HR director of Palmer and Harvey, a wholesale distributor, says:
“As part of the competitive tendering exercise, we impressed the need for flexibility and this sale and leaseback deal allows us to release capital investment into our core activity.”

While this option may provide a quick injection of cash, fleet managers need to be careful that their vehicles are not under-valued.

Contract hire

According to the British Vehicle Rental and Leasing Association (BVRLA), more than half of all new company cars registered each year are funded through contract hire.

Such arrangements are usually for a three-year period although some companies opt for longer, especially if the company cars or vans are provided as a perk rather than for a job-related purpose.

Roddy Graham, commercial director of Leasedrive Velo and chairman of the Institute of Car Fleet Management (ICFM), comments: “There is a definite trend towards contract hire with all costs guaranteed and fixed but, like any commercial agreement, there are downsides.”

These can include the need for large upfront fees to be paid, as well as being tied in to contracts which can restrict the ability of businesses to make operational changes at short notice, such as changing the number of vehicles.

Flexible rental

Vehicle hire companies have experienced a surge in organisations opting for the more flexible, but expensive, option of mid-term vehicle hire.

Offering total flexibility and with no contract in place, vehicles can be returned at short notice helping to minimise costs.

Mr Graham suggests that in times of economic uncertainty mid-term rental becomes popular and the signs are that this area is going to grow substantially over the next year.

Gareth Jones, group sales director with Northgate Vehicle Hire, is currently working with a number of organisations to move fleets that are owned outright to a sytem where they are run on the basis of flexible rental.

Such products focus on reducing wholelife costs and removing assets from the balance sheet while positively adjusting gearing and allowing clients to channel cash released from capital purchase and credit hire into other commercial areas.

Mr Jones says: “With increases in operating costs, funding restraints and market uncertainty such as residual risk and potential loss of contracts, businesses need complete flexibility in relation to how fleets are managed.”

Employee car ownership (ECO) schemes

Using their company car allowance, employees can finance a vehicle for a contract period of their choice.

As the title to the vehicle passes to the employee, drivers avoid paying benefit-in-kind tax.

There is also a duty-of-care benefit for fleet managers as an ECO scheme managed by an employer can bring more control than employees running their own cars for business purposes.

However, ECO schemes can be complicated to set up and can mean more administration as HM Revenue & Customs insists on regular audits.

It is also worth bearing in mind that ECO schemes suit some fleets more than others.

They are more applicable to those with a low turnover of staff, who are in a high tax bracket with high mileage.

So, how do fleet managers decide which funding option to take?

Increasingly the answer lies in a ‘pick and mix approach’ with each fleet having a variety of funding options rather than a single solution.

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