Funding for your fleet

Finance leasing, contract hire, hire purchase - Paul Harrison, head of motor finance at the Finance & Leasing Association, explains what different finance options are available for fleets

For businesses operating large vehicle fleets, it often doesn’t make economic sense to buy them outright. This could have significant consequences on a business’s cash-flow. So many vehicle fleets are either purchased on two-three year plus credit agreements or, as is more common, leased.
    
But what does this mean for the business, what are the different finance options available, and why might leasing be suitable (or not)?
    
For fleets, leasing and hire purchase are finance facilities that both allow a business to enjoy the use of a vehicle over a fixed period of time, in return for regular payments. The business chooses the cars or vans it requires and the finance company buys it on their behalf from a motor dealership or another channel. The major benefit of finance and leasing agreements is that a business has the ability to secure the use of an essential asset without the need to incur an immediate, up-front capital outlay.

WHAT ARE MY FINANCE OPTIONS?
The main options that businesses use to finance their fleets are leasing and hire purchase. Which one you choose will depend on what you want to use the vehicles for, how long you want to use them, and whether you want to end up owning them at the end of the finance deal or replacing them for a new model.
    
Lease agreements can take many different forms but the two main types are: finance leases and operating leases.
    
Under a finance lease, the finance agreement covers the full economic life of the asset – so if you plan to use a fleet of vehicles for ten years, then this is how long your leasing agreement will run for – and it’s assumed in a finance lease that the vehicle will have little (if any) market value at the end of the term.             

Therefore many finance leases can be extended after the initial rental period, usually for a nominal rental payment.

OPERATING LEASING
But the most common form of leasing is operating leasing, used for 53 per cent of all asset finance deals for cars in 2010.
    
These leases are normally for a shorter period of time, typically three-five years, and reflect how long the lessee plans to use the vehicles before replacing them. The leasing company set rental payments at a rate which covers the vehicle depreciation plus interest charges. When a vehicle fleet is returned the assets are still likely to be worth something and would therefore be sold or go out on a secondary lease agreement to a new customer.
    
Operating lease agreements are also referred to as ‘contract hire’ agreements. The cost of contract hire agreements are normally determined by the anticipated mileage of the customer over the full term of the agreement. Customers are often given the option of including service and maintenance packages to help them cover the full cost of running a vehicle in one convenient repayment.

HIRE PURCHASE
Hire Purchase (HP) agreements also remain very popular – used for 38 per cent of all deals in 2010. Put simply, the leasing company buys the asset and you make payments over the agreed contract period. Once you’ve made all the repayments, and paid something called the Option to Purchase fee which is a charge to transfer title to the customer, you will own the vehicles. But remember that the finance company owns the asset until the final instalment is paid. This option is best if you want your company to own the vehicles at the end of the contract, but payments will be higher than if you were just renting the vehicles for your fleet. The main benefit is that the vehicles can be resold once they are no longer needed.

HOW TO ACCESS FLEET FINANCING
The easiest way is to approach a company offering fleet funding, whether directly or through a broker. Members of the Finance & Leasing Association have signed up to our Business Finance Code, which guarantees customers clear, transparent service and also a method of redress should they have unresolvable complaints.
    
If you are seeking out fleet funding for the first time, you may find it easier to approach a broker to find suitable finance. Brokers have established relationships with many different leasing companies, and will be able to search their bank of lenders for the best deal for you. The National Association of Commercial Finance Brokers’ has a directory of specialist vehicle finance brokers.

FOR MORE INFORMATION:
Web: www.fla.org.uk

Finance options at-a-glance

Finance leasing
•    Long-term rental contracts, most likely for the life of the assets being financed.
 
Operating leasing / Contract hire
•    Short-term rental contracts – ideal if you change your fleet regularly.
•    Rental payments usually lower to reflect the asset’s value at the end of the contract.
•    Anticipated mileage will help determine the cost of rentals and it is common for service/maintenance packages to be built in.

Hire purchase
•    Suitable for companies that want to own their fleet at the end of the contract period, but don’t want to pay for them in one go.
•    Payments higher than for leasing as payments need to cover full purchase value of the car and interest.
•    Vehicle likely to have a resale value at the end of the HP contract, so some of the cost can usually be recouped.