The best of both worlds?

Outside outright purchase and contract hire, funding fleet vehicles is made up of a number of less common methods.

Many fleets have reported an increase in end-of-lease recharges when using contract hire, which could encourage them to consider alternatives.

If raising the money to buy vehicles outright is impossible, fleets could be persuaded to consider another method where there are no recharges for damage and excess mileage.

Finance lease can combine the advantages of vehicle ownership without some of the drawbacks, while in many ways it is also similar to contract hire.

Vehicles secured through finance lease sit on the company balance sheet which means the fleet operator is responsible for the disposal procedure, although the lessor may dispose of the vehicle on the fleet’s behalf. 

Businesses choosing finance lease can select a fleet management programme to help with ongoing maintenance and repairs.

The element of flexibility in finance lease allows the customer to select fixed payments to match the cash flow of the business and how the vehicle is expected to be used.

There is a primary lease period – normally anything from three to five years – and it is also possible to extend the hire period to allow the fleet to prolong the working life of the vehicle.

At the end of the primary period the customer pays what is usually called a ‘balloon payment’.

This is based around the likely value of the vehicle at the end of the lease and can be flexible, varying the level of the monthly charge – a lower monthly charge would result in a higher balloon payment.

With a high enough monthly rate, it is possible to fund the vehicle outright over the lease period, but it must be sold to a third party at the end of the term.

The fixed costs can make life easier with cash flow and budgets, but at the same time, the fleet operator takes on the administration and operating risks, such as unexpected maintenance, repairs and losses in residual value.

However, it can be tax-efficient as the vehicles appear on the company balance sheet and remain an asset of the business.

Although VAT recovered on purchase is reflected in lower rental costs, the vehicle is written down within the general asset pool.

Like contract hire, under a finance lease, the lessee doesn’t take ownership of the vehicle.

But there will be no excess mileage charges or damage recharges.

The lessee will receive the majority of the proceeds of the sale of the vehicle (taking into account that if there is an agreed balloon payment with the lessor, that will also have been paid).

The main difference between finance lease and contract hire is the residual value risk.

With finance lease, the customer stands to lose if the defleeted vehicles make less money than anticipated, whereas with contract hire, the leasing company takes the gamble.

Trends show that the number of cars procured through finance lease in recent years is declining slightly, although the status of the market for finance leased vans is more difficult to read.

With the volatility of the used vehicle market since 2008 – which is once again stabilising – it is possible that some fleets were stung when disposing of their cars and vans.

A sudden and significant shortfall in expected revenue from defleeting is likely to result in close scrutiny of how the operation is funded, and it is possible that many of those fleets that had used finance lease decided to look at alternatives.

But with recent complaints over high recharges for mileage and damage from leasing companies, the residual value risk for many fleets when choosing finance lease could be offset by missing out on those charges when the vehicles are remarketed.