Fleet News

Funding becomes major issue for contract hire sector

Some of the country’s largest contract hire companies are becoming increasingly concerned about difficulties they are experiencing trying to obtain credit.

A survey of 40 companies listed in the FN50 found that 95.6% of respondents confirmed that the credit crisis is already impacting on their sector and 87% said it was impacting directly on their business.

One respondent said: “The industry is clearly suffering – lack of funds available, cost of funds increasing, etc,” while another added: “The major banks have reduced their lending across the board…Banks seem to demanding ever higher margins for lending to us.”

The contract hire industry’s problems stem from the fact that its credit suppliers are reducing their willingness to lend.

And those that will lend are reducing their new business activity, focusing on the most creditworthy customers and charging higher interest rates.

Contract hire companies are often having to pass increased interest rate costs onto their customers.

However, it is not all bad news.

“The rate increases passed on by the contract hire sector have been lower because our members are able to use capital allowances to keep the funding rate lower than other forms of finance,” explained John Lewis, BVRLA director general.


“The results are unequivocal,” said Mr Tourick of Colin Tourick & Associates, which carried out a survey.

“Most who commented said that higher interest rates had resulted in higher rentals, and that their customers have not welcomed increased rentals at a time when some are feeling the effects of the economic slowdown.”

The economic slowdown is also making it harder for contract hire companies to sell used vehicles quickly, which is imperative to avoid stocking costs.

And, where their ex-rental and fleet vehicles are selling they are achieving well below CAP residual forecasts.

The latest data from vehicles auctioneer BCA shows that values in the fleet and lease sectors fell again last month.

“Average performance against CAP Clean continued to fall in most sectors, apart from nearly new,” said BCA’s Pulse report for May.

“Values for fleet and lease used cars fell quite sharply from £6,642 in April, to £6,428 in May - a drop of £214 in a month with similar age and mileage profiles.

The average decrease was equivalent to -3.2%. CAP valued the same stock at £6,906 a fall of £125 over last month and equivalent to –1.7%.”

As a result, the percentage achieved against CAP Clean by fleet and lease stock fell for the second month running from 94.4% to 93.1%.

“Retail conditions are being reported as very tough with some commentators forecasting that conditions could even get tougher before they get better,” said BCA communications director Tony Gannon.

“If vendors seek to obtain unrealistic prices now, it is likely their stock will remain unsold, incurring increased funding costs, even steeper depreciation and the risk of deterioration in the condition of their vehicles.”

Despite the gloomy outlook, some respondents to the survey said they still feel optimistic about the medium and long term outlook for their businesses.

“Several respondents said that they see the credit crunch as a good opportunity for them to grow their fleets at a time when others might have to reduce theirs because of funding constraints,” said Mr Tourick.

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