FINANCING THE VAN AND LIGHT TRUCK SECTOR

• By the Head of Sales and Marketing at commercial vehicle funding specialist Artegy.

Commercial vehicles are expensive assets that can tie up a lot of a company’s capital. As a result there is a growing trend towards alternative methods of funding, not just for the big trucks but also for smaller commercial vehicles.

Unfortunately, some outsourcing providers only offer one type of funding solution and thus lack the flexibility that any modern enterprise needs. Today’s LCV and light truck fleets require a full range of financing solutions, ranging from simple finance lease schemes to complex purchase leaseback packages.

These various funding options are especially important for the specialist vehicles that make up so much of the LCV sector. Today there is almost no such thing as a ‘standard’ van, as vehicles are provided with extras ranging from a reinforced cargo area to refrigeration units. With the extra expense of bespoke equipment, an effective financing package becomes even more important.

Rather than a ‘one size fits all’ approach, fleets require a tailored solution that exactly matches their needs in terms of risk, balance sheet, gearing ratios and fixed cost requirements:

• Finance Lease

Finance leases allow fleets to use the vehicle throughout its useful working life without ultimately owning it.

At the end of the lease agreement there are two options. The fleet can either continue to use the asset by simply paying nominal rentals, or sell it and benefit from a proportion of the sale proceeds. Either way, the company’s exposure to risk on the vehicle’s residual value is minimised.

The rentals on a finance lease are 100% allowable against tax in most cases, while the funding on these agreements is located on the balance sheet. This offers the transparency that some businesses desire.

For example, a finance lease might be popular among businesses that have obtained a five-year contract and need to align their asset costs directly with those secured contracts.

• Operating Lease

This finance product can be treated as 'off balance sheet' for accounting purposes, which can lead to improved financial ratios such as gearing and liquidity. At the end of the leasing period the leasing company takes on the residual value risk of the vehicle, protecting the fleet from the volatility of the market and any unforeseen changes in legislation.

In addition, when calculating the rental payments on an operating lease the residual value of the asset is taken into account. This results in rentals significantly lower than those offered on a hire purchase agreement.

For example, a company might choose to take vehicles on an operating lease if it operates standard vans or trucks, which are more subject to residual risk than specialist vehicles.

• Contract Hire

Contract hire agreements have become in recent years the mainstay of the vehicle leasing market. They are fundamentally operating leases, but also include a complete package including maintenance, service and repairs.

This gives companies worry-free upkeep of the asset throughout the term of the agreement and also means they know exactly what the expense for that asset will be. Thus budgeting and forecasting will be more accurate because the repayments are fixed.

Qualifying agreements are treated as off-balance sheet, which means that financial ratios such as gearing and liquidity are not adversely affected. In addition, in most cases rentals are 100% allowable against tax.

For example, a contract hire agreement would appeal to a company that doesn’t have the facilities available to maintain its own vehicles.

• Purchase Leaseback

Also known as sale and leaseback agreements, these packages are growing in popularity among businesses that have traditionally operated self-owned fleets. The vehicles owned by the company are sold to a financing provider, which then leases them back using a tailored funding scheme.

The primary benefit of these arrangements is that the capital tied up in a self-owned fleet is returned to the company. This can then be used to fund expansion plans and assist with financing core business activities.

Qualifying agreements are treated as off-balance sheet, which means that financial ratios such as gearing and liquidity are not adversely affected. In addition, in most cases rentals are 100% allowable against tax.

For example, a business might decide to adopt a purchase leaseback scheme for its fleet if it needed capital to invest in new production facilities.

• Hire Purchase

This type of agreement is popular among those businesses that wish to own the vehicle at the end of the repayment period, as the opportunity to take ownership of the asset is structured into the contract. The agreement is secured on the value of the vehicle being financed, so in the majority of cases no additional security is required.

Repayments can generally be tailored to match the needs of the business. As a result the company knows exactly what it has to pay and when, allowing it to plan ahead and retain control. A hire purchase agreement also usually enables businesses to claim Writing Down Allowances, improving their tax position.

For example, a company might favour hire purchase if it wants to own its own fleet but cannot afford to buy the vehicles all at once.

Flexibility is the key

No industry is set in stone, and there can be no doubt that the commercial vehicle market continues to face sweeping changes. As new legislation comes into force, fleets will have to adapt their funding solutions to take into account whatever the government or the EC may throw their way. Retaining a flexible outlook – and using a funding provider with a similar approach – will serve them well.