You’ve decided to switch: what do you do next?

Any fleets considering switching to leasing from outright purchase should begin by finding a good leasing company, says David Rawlings.

“Fleet managers shouldn’t speak to just one leasing company, but to a number of them,” he says.

“Get them in, look at the whites of their eyes and ask them how they can save you money and make your fleet more efficient.

“If they can’t spend 10 minutes on the phone and if they’re not prepared to come and talk to you, look somewhere else.”

He adds: “A lot of businesses will go to their local dealer because that’s where vans are bought from, but there are 50 good leasing companies and a few hundred good brokers out there that can do them a very good alternative deal.”

Rawlings says when switching to leasing, most companies will keep hold of the vans they already own and just replace them with leased vehicles at the end of their replacement cycle.

If a company wants to generate capital for its  business, either to support it through difficult times, improve their balance sheet or support growth and investment, it may be able to sell its outright purchase fleet in a sale and leaseback arrangement to generate capital.

Case study: Open University

Switching to contract hire from outright purchase will save Open University an estimated £103,900 over five years.

Since August, the Milton Keynes-based organisation has leased its 11 vans and two minibuses on a five-year term and its three pool cars on a three-year term through Automotive Leasing following a review of funding methods.

“Traditionally, we have always outright purchased our vehicles,” says David Lewis, transport and portering manager at Open University.

“I looked at all the costs involved in operating those vehicles, then obtained quotes from leasing companies to compare the costs of contract hire and outright purchase.

“It worked out cheaper to lease rather than outright purchase and maintain the vehicles ourselves.”

He says the fleet’s maintenance costs tend to be relatively small as average mileage is low – the vans generally operate on campus or within Milton Keynes – but as this means a lot of stop-start driving, vehicles can incur a lot of wear and tear, particularly on tyres.

“In some respects there are higher costs than in vehicles that are doing significantly higher mileages,” adds Lewis.

Although cutting vehicle operating costs was the main driver of the switch in funding, it has also reduced the amount of time Lewis spends managing the fleet, allowing him to focus more on his other responsibilities.

Among the administration removed is defleeting vans. “Previously I would obtain a minimum of three quotes from various sources and locations and I would sell the vehicle to the highest bidder to maximise the income to the university,  but the leasing company looks after  that now,” says Lewis. “Also, vehicle  depreciation had the biggest impact on costs and leasing means that this financial risk has been taken away from us.”

The university took up an option for sale and leaseback, so Automotive Leasing purchased the vehicles, which gave a “one-off income stream coming in, which was a benefit”, says Lewis.

Case study: Hydraquip

Hydraquip was able to invest its working capital into funding a growth strategy after switching to leasing its vans instead of outright purchasing them.

During 2014, this helped fund four  new branches to expand the growing national network.

The nationwide Hydraquip Group comprises three independent companies – Hydraquip Hose & Hydraulics and Hydraquip Braided Hose Division plus Linden Hose and Adaptors which was acquired in 2013 – providing hose  solutions to a multitude of companies from sole traders to multi-national blue chip groups.

“We had previously funded vans out  of our working capital, but I wanted to accelerate our growth and expand the fleet, and leasing the vehicles just seemed like a much more sensible, cost-effective way to do that,” says Duncan MacBain, managing director of Hydraquip.

“Previously we would buy a van at, let’s say, £22,000 and spend £8,000 to £8,500 kitting it out.

“I took the view that, with the cost of changing, it was probably worthwhile keeping vans on the road for a long time, so we were running them for seven, eight or nine years until they were uneconomic to repair.

“The increased maintenance needed also brought the intangible cost of  vehicles being off the road, so we are going to try and keep the fleet newer and suffer less consequences of running an older fleet.”

Hydraquip has grown significantly in recent years, both organically and through the collapse of two competitors in the recession. The company currently has more than 100 light commercial vehicles, the majority of which are now leased through Ogilvie Fleet on a three-year/120,000-mile replacement cycle.

The remainder will be replaced with leased vehicles when they are defleeted.

MacBain adds: “I used to be quite against leasing vehicles. I had the mindset that if you own something, you know where you stand, but in reality when running a business it doesn’t really  matter whether you own something  or lease it – it’s what you do with that asset to make money.”

Don’t forget the other option: long-term rental

Fleets thinking about contract hiring vans should also consider long-term rental, says Carlos Montero, commercial director at FleetEurope. “Some fleets have opted for contract hire, but some have moved to long-term rental programmes,” he says.

“Both offer outsourced maintenance management and virtually risk-free fixed charges.

“The only downside is that damage sustained to vehicles will be recharged, usually over and above a minimum fair wear-and-tear standard.

 “Depending on how hard a commercial fleet is worked in terms of mileage, fleets may choose long- term rental over leases for the associated flexibility.

“Leases, by their nature, come with penalties if returned early, whereas rental offers the fleet manager options to end the hire without penalty.

“Pro rata lease vehicles will be more cost effective and base rentals will be lower, but what price do  you put on flexibility? Fleets are all very different and sometimes a mixture of the two may be required: leases for vehicles that will be core to the business or need bespoke specification, with a mix of long-term rental on more standard specified  vehicles that may require flexibility in termination.”

One fleet which has switched to long-term rental is United Worldwide Logistics (UWL), a South Wales-based company with 21 light commercial vehicles.

Its high mileage requirements became a costly issue, but through a rental partnership with Northgate Vehicle Hire, it was able to remove the issue of downtime, as it is now able to add vehicles to its fleet at any time. With no ties or commitments, UWL is able to hand back the vehicles when it no longer requires them. This change improved annual cashflow by £10,000. Service and maintenance costs have been reduced by a further £10,000 per year.