Leasing trends Pt 2: The future of funding

Funding will need to become increasingly flexible to enable fleet decision-makers to tackle the myriad challenges facing their operations.

The overwhelming view from FN50 leasing companies is that they will be able to offer a wider range of services, be adaptable in their agreements and step-up their support for UK businesses. Subscriptions models could play a bigger role, although some are sceptical about this supposed ‘new’ form of finance.

Lakshmi Moorthy, Arval UK managing director, sums up the view of many when she points to the impact of the coronavirus pandemic, which has revolutionised views on office/home working as well as being a major reason behind the lengthening vehicle supply times. She says: 

“The pandemic has seen many rethink where they choose to live, with increased homeworking in job roles where it’s possible and an element of financial uncertainty post-Covid-19 – flexibility is therefore a key matter for funding.” 

“Getting more for less is an important factor for funding choices, so customers are likely to be more open to funding choices that are tax friendly. This is what we see in the case of salary sacrifice (sal/sac), where the low benefit-in-kind (BIK) tax has opened up electric vehicles (EVs) to a wider audience, particularly those who are not eligible for a company car.”

Sal/sac terms are typically over a two- or three-year period and are viewed as a way for employers to attract and retain staff.

Novuna Vehicle Solutions is seeing sal/sac, once the preserve of larger corporates, cascade down to smaller companies, buoyed by low taxation levels.

Managing director Jon Lawes (left) says it has been “transformed” by taxation changes, making it an attractive benefit and cost-efficient way to fund a new car. He says:

 “We see providers looking beyond the large employee bases that were the focus of sal/sac sales historically with a shift to bringing the product to smaller employers.” 

Personal contract hire

As organisations seek new ways to offer attractive benefits to staff, Arval is seeing a rise in interest for personal contract hire (PCH), giving those not eligible for a company car access to transportation with a fixed monthly cost over a flexible period.

Grosvenor Leasing has also identified this trend. Demand has “allowed us to grow our PCH division substantially”, according to Mary Dopson-Taylor, customer service director.

Meanwhile, to help customers with lower budgets, Arval has become one of a handful of leasing companies to offer used car leasing options, which increases affordability and enables companies to opt for a vehicle over a shorter timeframe, typically one or two years.

Subscription and pay-as-you-go (PAYG) models have long been discussed in the corridors of leasing companies, but few have ‘cracked the nut’.

Recent newcomer Zeti believes it has the solution to PAYG by matching connected vehicle technology to the finance, buoyed by growing interest in ESG (environmental, social and governance) funding (see page 10 for details).

Novuna’s Lawes points to the growing appetite for subscription models across almost all household products including bicycles, furniture, holiday homes and even clothes.

“Subscriptions or bundled vehicle products will be in high demand, with the focus of simple, flexible funding,” he says.

“The industry must adapt to consumer trends and demands by offering more flexible terms, subscription options and ‘bundled’ EV packages including home/public charging.”

MultiFleet agrees: “We have already seen an increase in demand for shorter term solutions. In the wider market this will be made up of a combination of new subscription-based solutions, shorter leases or existing rental operators re-packaging rental as a subscription service. PAYG models will increase in popularity, but only for low mileage drivers as the savvy users realise that the model is not cost-effective for high mileage drivers.”

SG Fleet highlights a geographical impact on subscriptions models if people move away from traditional commuting areas.

“As property density decreases, feasibility of subscription or pay-on-use models decreases due to the physical limitations of locating vehicles in these areas in a cost-effective manner,” it says. “Car usage is also often more necessary in these areas due to reduced dense public transport availability and a wider geographical spread of necessary public facilities.”

Copycat solutions

Like Novuna, ALD anticipates copycat funding solutions to the mobile phone market, as EVs naturally lend themselves to bundled solutions, including, for example, a certain amount of public charging within the lease and a home charger.

As Multifleet highlights, daily rental can play a similar role to subscriptions and PAYG for funding flexibility and several leasing providers expect demand to grow for those types of services.

Ogilvie managing director Gordon Stephen says:

“Daily rental is an option – as people travel to work less, they may use rental as a means to plug the gap.”

Sinclair Finance and Leasing also forecasts a rise in rental, but adds: “Customers may look to operate a bigger pool car fleet due to lack of requirement for permanent cars and reduced mileages.”

Paul Gilsham, Tusker CEO, points to growth at both ends of the funding spectrum:

“Tusker has responded to requests for change from customers to provide shorter and longer agreement options for employees to increase inclusion for lower earners and those on shorter employment contracts.”

Meanwhile, Alphabet head of corporate and international sales Stuart Cunningham also believes short-term leases can bridge the gap between rental and longer-term leases.

“We recognise this will remain a popular route for many as businesses flex their fleets to changing requirements,” he says.

Giving contrasting views about the future direction of the funding sector are JCT600 Vehicle Leasing Solutions and VMS Fleet Management.

Ben Creswick, managing director at the former, claims subs and PAYG models are best suited to retail customers. He says: “For our core customer profile, we do not believe shorter leases, subscription or PAYG models will be of value in the short- to mid-term. Corporates remain wary of trading off one type of risk which they have a history of managing, e.g. fixed contracts, for unknown risks such as inflated end-of-contract damage in addition to in-life charges often associated with such products and suppliers, while paying a premium for flexibility.”

However, VMS Fleet Management says its customers are shying away from long-term contract hire commitments.

“The current market leans towards more short-term funding due to the risk factor of potential drops in business when they are tied in,” it explains. “That is mixed with a time when funding is not as easy to obtain as previously, so there has to be more flexibility offered by funders.”

Not everyone is convinced that the industry is set for a funding revolution.

Zenith car and van division chief executive Ian Hughes (left) says: “We’re not anticipating any material change in the coming years. The market is already served with a variety of flexible options today.”

And Total Motion managing director Simon Hill adds: “Broadly, options will remain as they are now. Subscription and PAYG will find a level as a small part of a bigger picture with 24-month-plus leasing remaining dominant. Many pay-as-you-go and subscription services are failing as people realise it’s just another option.”

Taking all the various industry views and ongoing economic uncertainty into consideration, SG Fleet concludes: “Predictions of a move to other funding models are very difficult to undertake with any accuracy, and it’s up to providers to have as many options as possible available to ensure flexibility and agility as we move into the future.”

Van funding points to longer-term lease agreements

When it comes to light commercial vehicle (LCV) fleets, many companies already use flexible, shorter-term funding to enable them to increase or decrease their fleet size dependent on workloads.

This can be a more expensive route, although several companies have agreed competitive flexi-lease packages with both rental and leasing operators.

However, Alphabet believes rapid rises in business levels, particularly for delivery companies, are giving van fleets the confidence to return to longer-term funding.

“This is offering a more stable proposition and a more competitive price, so we’re seeing the opposite funding trend to company car fleets,” says Alphabet head of corporate and international sales Stuart Cunningham.

He adds: “Another funding option we’re likely to see companies using more is Contract Purchase, assuming the current VAT treatment for LCVs continues. This enables the full VAT to be deducted upfront for LCVs, creating cost savings on monthly instalments, and allowing companies to settle early when they’re in a cash-rich period.”

Nevertheless, like the car market, LCVs will continue to require flexible funding options to facilitate short- and medium-term growth. Cunningham adds:

“This is why it remains so important for leasing companies to continually adapt contracts to meet changing requirements."