Fleets Informed

Fleets Informed

Q&A from Lex Autolease

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Which funding option is the best solution for you?

Wealth of experience and useful data will help fleets make the right choices

1. What are the principle financial considerations when deciding how to fund a commercial vehicle?

The main considerations when companies are deciding to fund a commercial vehicle fall into two areas: financial and operational.

Financial considerations are driven primarily by the impact of borrowing on their balance sheet. So while this is likely to change for operating leases under IFRS Lease Accounting rules next year, midsize and smaller companies under UK GAAP rules may still benefit by the off balance sheet position of contract hire. In addition, notwithstanding the cost of
borrowing, cash flow is important. Therefore lease structures can be more flexible by the use of lower initial rentals and lump sum or balloon payments, reducing the cash required to service the debt on the asset.

Operational considerations are also key in the decision process, and need to answer the question: “Does my business have the resource to manage the compliance and service events?”

Businesses often look to outsource this using contract hire and then manage their supplier(s) which is an extremely effective use of resource. The commercial vehicles may be critical to the business and its operation and contract hire can support businesses with these operational challenges while non-maintained funding packages will require the operator to manage the day-to-day running of its fleet.

2. How can fleets forecast the residual value of a van that has had significant conversion or modification?

Forecasting the value of a vehicle at the end of its useful working life is a challenge and subject to market fluctuations, local demand and the conversion’s secondary value. Accurate forecasting requires an understanding of the economic cycle, the number of vehicles in the market, and the demand for the specialist or bespoke conversion in a business sector.

At Lex Autolease, the benefit of our risk portfolio means we have access to historical data, which allows us to analyse and consider the impact of individual conversions
on a base van. This can be backed up where necessary by our vehicle re-marketing team, our relationship with BCA and also third party specialists. Comparisons with unconverted commercial vehicles allow us to reflect the necessary adjustments at a bespoke level.

3. How can fleets forecast the residual value of a van that will have high mileage and a hard working life behind it when it’s remarketed?

Similar to the conversion forecasting, there is a ready market for high mileage well-maintained vans where the new owner/operator may just be using it for short journeys, from home to a building site, for instance. Accurately forecasting this value again relies on experience and data. As above our risk portfolio provides us with data upon which we can consider
the impact of customer-specific usage where we have the experience. Where we don’t, we can turn to our own vehicle re-marketing team or external sources including BCA for evidence to support any usage adjustment. Furthermore, model or sector-specific lifecycle matrices are built into our quotation database, all of which take into account how mileage
affects the used value of a van; which is the foundation of our forecasting methodology.

4. How can a leasing company help in the sourcing of an appropriate new commercial vehicle?

Leasing companies are able to provide expertise and advice on specification,including the latest technology and innovation to customers when choosing their commercial vehicles.

With increasing legislation and challenges such as extra weight which is lowering payloads, their advice can help businesses make informed decisions on choosing a vehicle that is suitable for their operational needs.

In addition, we have a broad supply chain and work with converters and suppliers to specify vehicles which would otherwise take businesses resource and time. Once a vehicle is ordered the leasing company manages the supply chain ensuring the vehicle is delivered to the specification, quality and on the agreed timeline.

5. What finance options are open to a fleet that prefers to source second-hand CVs?

When buying a second-hand vehicle the business choices reduce. However, there is still a variety of asset finance solutions available to fleet operators such as traditional hire purchase and lease purchase. Finance Lease is also an option but only suitable if the vehicle is still within VAT reclaim. The operator may also be able to benefit from reduced rentals via balloon and lump sum residual payments. Some lease companies will put residual values on used commercial vehicles on personal contract purchase (PCP) agreements, but these are limited. 

6. How can fleets ensure their vehicles are always roadworthy and legal unless they own them and oversee the service and maintenance?

One of the main benefits of using contract hire and other maintenance funding solutions is that the maintenance is paid within the lease. It is therefore more likely that the operator will keep the vehicle maintained and free from faults as the service will have been paid and budgeted for already.

The leasing company will send scheduled reminders on maintenance events, and tend to use manufacturer providers for service maintenance and repair wherever possible, so the vehicle will be maintained as recommended. In addition, a replacement vehicle is often provided within the contract.

7.Given the political and environmental concerns over air quality in urban areas, what grants, subsidies and finance options are available for hybrid or electric vans?

The use of electric vehicles is becoming more commercially viable on a wholelife cost basis. We are now seeing some small van derivatives showing a lower wholelife cost than their diesel counterparts. So choosing an electric van, dependent on the job role or operation is becoming not just a green decision but a serious financial one.

There are several ways companies can currently benefit from running electric vehicles (EVs):

■ Grants of 20% of the vehicle cost, up to a maximum of £8,000 are available, including additional grants for chargepoints for work and domestic use. These are subject to review in 2018 but we would expect these to continue for a while longer with the current pressure and comment on environmental issues.

■ Fleet operators and companies buying commercial EVs can write down 100% of the capital cost against tax in the first year of ownership (this may not apply if the vehicle is leased).

■ Electric vehicles are currently exempt from the London Congestion Charge, apart from a small annual registration fee. Given the Mayor of London’s proposed change in the diesel levy in 2019 being extended to all non-E6 vehicles this could represent a serious option for low-mileage delivery requirements.

■ Electric commercial vehicles are exempt from the annual Road Fund Licence tax but only if it’s a zero emissions vehicle.

8. How can companies operating in the gig economy provide their franchisees with competitive vehicle finance options?

There have been owner-operator programmes available via leasing companies for many years. The key challenges are the individual credit risk of the franchisee and the lender’s perception of the value of the franchise.

It is a successful model used in some elements of the construction industry and now home delivery, and can maintain a company’s image and standards while reducing the risk. It is not easy to set up – requiring engagement with the supply chain, the leasing company and vehicle manufacturers – but pulling together a programme is possible. Companies looking to adopt this model who are able to articulate the long-term viability of the franchisee and strength of the franchise contract will give lenders and suppliers the comfort that they need.

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