Finance restrictions spark shift in vehicle funding decisions

The latest quarterly Company Car Trends survey from GE Capital reveals that just 17% of the 300 customers who responded now use outright purchase, compared to 38% in the last quarter of 2009.

Conversely, it suggests that leasing is making gains. In the same period, the use of contract hire has risen from 42% to 66%.

Sewells research from 2010 indicates that just under 40% of fleets use outright purchase as one of their funding options for cars; GE’s research, predominantly with car fleets, suggests that proportion is falling as fleets switch to leasing.

Gary Killeen, fleet services commercial director for GE Capital, said: “Many of the fleets included in the survey will be using more than one acquisition method as part of their mix and so the research does not suggest that the total amount of vehicles on fleet that are outright purchase have halved. It refers to new vehicles registered today.

“However, the findings do suggest that there may potentially be a significant shift in thinking on the part of the respondents over time. This could be an early indication of a change that sees leasing come to dominate fleet acquisition.”

Car funding ‘mirror image’ of van

In the Fleet200 survey of some of Britain’s biggest fleets, conducted by Sewells on behalf of Fleet News, more than a quarter of companies (29%) said they still used outright purchase as their main car funding option, driven either by specific accounting needs or a belief that they can purchase, service and dispose of vehicles more cost efficiently than a leasing firm.

However, it discovered that van fleets were almost the mirror image of car fleets, with 42% favouring outright purchase and 35% leasing.

In contrast, 43% of fleets favoured contract hire as their method of funding for cars.
Residual value risk

Killeen said: “Outright purchase is a good option when a company is cash rich or can borrow money cheaply and is more comfortable to carry the residual value risk on the vehicle. In the current economic climate, there are far fewer companies who can tick all these boxes.

“It is for broadly the same reasons that contract hire is increasing in popularity. Cars and vans can be acquired with minimum upfront outlay, monthly expenditure is fixed and determined in advance, and the potential burden of residual value risk is removed.”

Public sector fleets such as police and local authorities, and some van fleets tend to have higher proportions of outright purchase due to the need to convert or modify vehicles.

Companies who keep vehicles for longer operating cycles, typically five years or more, and smaller fleets, particularly those with fewer than 50 vehicles, are also more pre-disposed towards outright purchase as a way of ‘squeezing the asset’ prior to disposal.

LeasePlan told Fleet News that it had seen “no noticeable shift from outright Purchase to leasing”.
The leasing company reported that the “died in the wool” outright purchase organisations like the flexibility they get with owning their own cars, keeping them for as long a short a time as they like without the risk of any early termination fees and the car is always theirs.

Access to funding

However, access to funding has been a major issue for businesses and continues to be so, according to business secretary Vince Cable.

Appearing before MPs recently, he condemned Britain’s biggest banks after more evidence that they are failing to increase lending to businesses.

Cable said that the British Banking Association (BBA) figures, which show that companies received £4.7 billion less in loans in March compared with February, were “very disappointing”.

He said: “In terms of access to finance, there is still a serious problem and that is confirmed to me every time I meet business people around the country.”
Andrew Kirby, regional and public sector sales director at Lex Autolease, highlighted how this lack of liquidity was affecting fleets.

He said: “There is a discernible trend towards firms exiting outright purchase arrangements and employing less cash-draining alternatives such as contract hire.

“This is largely driven by two financial considerations. Firstly, the need to restructure their overall borrowing facilities, but also the realisation that this cash could be reinvested into new projects with better returns.”

Roddy Graham, commercial director at Leasedrive Velo, added: “Many companies will look to
utilise external sources of funding for vehicles to protect their own credit facilities and/or cash with the bank.”

Used car volatility takes its toll

However Arval, which grew the number of vehicles it was leasing by 10% between 2009 and 2010, also suggests the volatility of the used car market has taken its toll.

Fiona Hall, commercial director at Arval, said: “Fleets outright purchasing may well have incurred losses in disposing of vehicles, while those companies leasing vehicles were protected from this decline in the value of used vehicles.”

However, many fleets that outright purchase are able to take a more flexible approach to selling cars by keeping hold of vehicles until residual values improve.

In contrast, some leasing companies were forced to encourage fleets to retain cars beyond their normal operating cycle during the residuals slump of 2008 by offering discounted terms in order to protect their own businesses from losses.

Nick Hardy, sales and marketing director at Ogilvie Fleet, suggested fleets should take a more analytical approach to funding.

“While I believe that contract hire provides the best all-round solution for most fleets, it isn’t right for every fleet,” he said.

“Many factors have to be taken into consideration when looking how best to fund a fleet and one solution doesn’t fit all, nor does that one solution fit one fleet.”

The research from GE Capital confirms that fears over proposed changes to the international rules on lease accounting have been “overblown”, according to BVRLA chief executive John Lewis.

“The benefits of leasing will remain, regardless of what rules are in place,” he said.
The proposed changes, which will now not be finalised until later this year, go into effect in 2013.