Share me. Choosing the right fleet option for your company

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1 Light Commercial Vehicle Acquisition Hire or Buy? Choosing the right fleet option for your company 1

2 Contents Hiring or buying LCVs. Why does it matter? Fleet ownership the benefits Fleet ownership the drawbacks Fleet rental the benefits Fleet rental the drawbacks Making a choice: benefits vs cost About Burnt Tree

3 Hiring or buying LCVs. Why does it matter? If your business operates light commercial goods vehicles and you are due to update or expand your fleet, it s only one of many spending decisions that you may be in the process of making. For example, if you re a mid-sized firm of electrical contractors, a cost-effective and efficient fleet is critical. But so are electrical materials, tools, training and many other business essentials. But sourcing the right kind of fleet can be complex because the headline costs rarely tell the whole story. On paper, it often seems cheaper to buy the vehicles than it is to hire them, but you re rarely comparing like with like. If you buy, you have to factor in extras like maintenance and downtime and if you re leasing them, you need to work out how much inclusive services like maintenance and roadside repair are worth to your business. When you compare the pros and cons of renting and buying, some of the key areas to consider are: Capital and cash flow Will I lock up capital in vehicles, and how will that affect my cash flow? Ongoing costs How much will servicing, MOTs, tyres and other maintenance work cost and how much will it add up to? How much productivity will I lose if a vehicle is out of action, and how much will it cost me to find a replacement vehicle? 3

4 Disposal costs What return will I get on used vehicles, and how much will it cost me to replace them? Company image How much will it cost to maintain a newer fleet than my competitors? How old will vehicles be when it makes financial sense to replace them? Legal compliance How much money and administration time will I need to spend on compliance measures such as EC Whole Vehicle Type Approval and European Emissions Standards? Choice and modifications What choice of vehicles do I have, and how much will it cost to modify them with any equipment such as tail lifts or beacons? Flexibility How do I cover fluctuations in demand? Can I source vehicles at short notice, or will I need to allow some vehicles to stand idle? When you look at vehicle costs from these perspectives, you soon discover that there s more than meets the eye when comparing leasing with vehicle purchase. Whether it makes better business sense to buy or rent depends on your day-to-day vehicle needs, but this short guide is here to help you understand the benefits and drawbacks of both. Whether it makes better business sense to buy or rent depends on your day-to-day vehicle needs 4

5 Fleet ownership - the benefits Buying your own fleet can bring undoubted advantages to the right kinds of business. If any of the following would help your company, it s possible fleet ownership is for you. But be sure to weigh these benefits (and the drawbacks in the next section) against other fleet acquisition options. Unused capital If your business has spare capital, you can invest it directly in LCVs without having to pay interest on a bank loan or overdraft. Preferential credit lines If you can arrange loans or an overdraft at competitive rate s, buying vehicles may be a relatively economic option. Tax benefits Vehicle ownership entitles you to claim a write-down allowance of up to 100% in the case of electric LCVs. However, this can be as low as 10% per annum if CO2 emissions are more than 160g/km Unlimited mileage If you own a vehicle, there is no restriction on the annual mileage it can cover or penalty charges for exceeding a certain mileage (but remember high mileages can seriously reduce resale value). Used vehicle options You can also choose to buy secondhand vehicles, reducing your initial capital costs. However, beware of additional maintenance costs, lost productivity if vehicles fail and a lower likelihood of securing a loan for this kind of purchase plus negligible disposal values. 5

6 Specialist use If you have highly specialist modifications needed for your LCVs, you may find it easier to fulfil them if you buy your vehicles. However, note that some rental companies do offer quite high levels of modification, sometimes at no extra charge. Choice of suppliers and vehicles If you buy, you have a greater choice of suppliers and may be able to mix-and-match more vehicle brands and specifications. If we return to the example of our mid-sized electrical company, the main benefits to buying are likely to be the tax benefits and choice of suppliers mileage and specialist modifications are much less likely to be an issue. On the other hand, a civil engineering firm might need a wide range of specialist modifications to its LCVs and prefer to source them from a range of suppliers that are experienced in adapting the vehicles it needs. The trick is to weigh the benefits of buying with the disadvantages. Turn the page to learn more about these. Whether it makes better business sense to buy or rent depends on your day-to-day vehicle needs 6

7 Fleet ownership - the drawbacks The biggest disadvantages to fleet ownership concern hidden costs and loss of productivity. If any of the following would cause problems for your business, you would be wise to at least consider fleet rental as an option. Locked-in capital Even if you have spare capital, there may be more productive ways for your business to put it to work especially as the resale value of LCVs tends to be much lower than the price you pay for them. If you need to release capital quickly, you could also face a cash flow crisis if it s tied up in vehicles. Interest payments If you fund vehicle purchase via a loan or overdraft, interest payments will push up the overall cost of ownership. If you choose a variable rate loan, interest payments could also increase, sending the total cost up further. Overdrafts can also be called in at short notice, so be wary of this form of funding. Responsibility for maintenance If you own your vehicles, you take full responsibility for servicing, tyres, and other work needed to keep LCVs on the road. If you don t have in-house maintenance professionals, this can be expensive and keep your vehicles off the road for days at a time meaning you ll need to source another vehicle to keep your staff working. Duty of care to your drivers is wholly your responsibility, along with any accidents resulting from poorly-maintained vehicles, up to and including corporate manslaughter. 7

8 Separate breakdown cover You will need to arrange and pay for your own breakdown recovery service. Low disposal prices There is no guaranteed return on the sale of your used vehicles, and you may have to pay transaction costs that further push up the lifetime ownership cost of each vehicle. If you don t replace your vehicles regularly, maintenance costs can grow as mileage increases and shabby, older vehicles can start to give a poor professional image. The positives of vehicle ownership are counterbalanced by cost, productivity and administration considerations Meeting fluctuating demand f your business expands quickly, or you have seasonal fluctuations in the amount of work your business does, your need for vehicles will not remain constant. If you buy your vehicles, you ll either have LCVs sitting idle or have to buy or rent more to meet spikes in demand. Legal compliance and admin If you specify your own vehicles, you bear responsibility for ensuring they meet EC Whole Vehicle Type approval and emissions requirements, as well as ongoing legal requirements such as MoTs. As you can see, the positives of vehicle ownership are counterbalanced by cost, productivity and administration considerations. While some major companies with large fleets might find it economical to run their own vehicle management and maintenance departments, these burdens can cause problems for mid-sized businesses in particular. The alternative, of course, is for these businesses to hire their fleets. But do the benefits really make rental an attractive option? Once again, it depends on your business requirements. Turn to the next section to find out whether renting can bring something valuable to your company s efficiency and bottom line. 8

9 Fleet rental - the benefits Many businesses have retained a vehicle purchase model as they ve grown, often without checking whether hiring LCV fleets could bring them cost and efficiency benefits. If your company is one of them, it s worth knowing that different commercial fleet operators offer a variety of rental options. The three most common are: Contract hire You lease vehicles for a fixed term, in return for an agreed monthly cost. The advantage with this arrangement is that you usually benefit from the lowest per-vehicle rental prices a company can offer. Flexible hire A smaller number of companies will also offer you flexible rental options. It is usually more expensive than contract hire, but you can return vehicles without penalty at short notice ideal if you have fluctuating vehicle needs, or short-to-medium term projects that need LCVs. Daily hire Similar to non-commercial vehicle hire, you can lease a vehicle for a day, week, month or other period to meet a short-term need. Many companies choose contract or flexible hire for the bulk of their fleet requirements because it offers them a range of commercial benefits. These can include: Fixed monthly costs Your cash flow is more predictable because you pay a fixed monthly cost for rental, which includes maintenance, repairs, roadside assistance and replacement LCVs in the event of breakdown. Off balance sheet leasing The vehicles remain on the lease provider s balance sheet, not yours. No depreciation costs Similarly, the lease company bears the cost of depreciation, not you. Tax deductions LCV rental is fully deductible for tax purposes, regardless of the CO2 emissions of the vehicles. 9

10 New vehicles Hire vehicles are usually new, or at least under 3 years old helping your company maintain a professional and favourable impression. Bespoke vehicles Many companies will supply vehicles in your livery or with equipment like beacons and tail lifts at significantly lower cost than you could achieve by organising it yourself. No maintenance or reliability hassles Maintenance and service intervals are taken care of, right through to free tyre replacement when needed. As a result, your fleet is kept reliable and in good condition, at no additional cost. Less downtime Some vehicle providers have mobile repair and maintenance teams, meaning you don t have to return a vehicle for scheduled work. Many provide you with a free courtesy vehicle if one of your LCVs is out of action for any length of time. Less admin time You spend less time sourcing and disposing of vehicles, saving on administration costs. Fewer legal worries Vehicle providers take care of compliance issues such as emissions test, MoTs and EC Whole Vehicle Type approval. They are also responsible for legal claims that arise out of maintenance issues. Solving other vehicle requirements LCV lease companies frequently offer company cars, HGVs and specialist vehicles making it simple to source them at the same time, often on favourable terms. On the face of it, vehicle rental is ideal for businesses that want predictable LCV costs, minimal administration worries, less downtime and high quality vehicles. Mix-and-matching contract hire, flexible hire and daily hire also allows you to cover fluctuations in your LCV requirements, simply and cost effectively. But what about the disadvantages? Are there factors that can make LCV hire less suitable for your business? There are. Turn to the next section to learn about them. 10

11 Fleet rental - the drawbacks Fleet rental isn t without its drawbacks, but some of them are specific to particular forms of leasing. As you ll see, you can mitigate some of the disadvantages by opting for a different form of leasing arrangement. Termination penalties If you opt for contract hire, you can face expensive termination penalties if you end the contract early. You can overcome this problem by choosing flexible hire, which is more expensive but allows you to end the agreement without notice. Limited mileage Both contract and flexible hire will impose limits on your mileage, and you will face penalties or additional charges if you exceed it. However, businesses like the electrical contractor we cited earlier in this guide are unlikely to cover anything like the mileage needed to turn this into a pressing issue. No asset at the end of contract When the hire contract ends, you no longer have an asset in the form of a used vehicle although this can be a benefit if the value of your vehicles has significantly depreciated. Highly specialised vehicles If you have complex bespoke requirements, leasing companies may not be able to provide the specialist vehicles you need. However, many are able to offer significant modifications, sometimes at no additional cost so if in doubt, ask. As we ve covered the pros and cons of both LCV purchase and hire, there has been one factor still to be discussed price. To make your final decision, you need to know which is ultimately cheaper hire or rental. In the next section we take a closer look at the figures. 11

12 Making a choice: benefits vs cost As you ve read this guide, you will have been struck by the large number of potential benefits that leasing your LCV fleet can bring from all-inclusive maintenance to freeing up your admin time as you leave compliance issues to your rental company. For both buying and renting vehicles, the attractiveness of the benefits and the severity of the drawbacks very much depends on your business model. If you re a company that needs high mileage, ultra specialist vehicles, then the advantages of buying will probably outweigh those of leasing. On the other hand, if you re a mid-sized contractor, leasing would appear to offer benefits that simplify the way you source vehicles and leave you free to concentrate your energies on growing your business. But what about cost? Even if renting is a more attractive option, will it cost you more than buying your vehicles? The answer depends on the type of hire you choose. However, research by Professor Peter Cooke, Professor of Automotive Management at the University of Buckingham has found that contract hire can be significantly cheaper than vehicle purchase see the table overleaf. contract hire can be significantly cheaper than vehicle purchase 12

13 2 Years 3 Years 4 Years Outright Purchase Full Maintenance Contract Hire 10,000 mpa ,863 20,000 mpa 11,617 9,872 30,000 mpa 12,702 10,833 10,000 mpa 12,923 9,254 20,000 mpa 14,043 11,299 30,000 mpa 15,376 13,254 10,000 mpa 14,957 11,516 20,000 mpa 16,457 12,729 30,000 mpa 17,624 14,261 Figures represent net present cost using 15% def rate Comparable outright purchase and full-maintenance contract hire Contract hire includes service, replacement vehicle, RFT and service admin Outright purchase includes above plus allowance for administration and used vehicle prices at CAP plus 550 Capital cost of unit on the road 19,295 including first years s road fund tax 137 These calculations have been made using the concept of discounted cash flow, which projects the value of business assets according to how their cash value changes over a period of time. The concept of DCF essentially works on the basis that the value of money decreases over time. It s rather like being given 100 to buy something and the option of paying for it now or in 3 years time. If you pay for it now, the cost in real terms is 100. If you defer payment for 3 years the value of 100 will have fallen so the cost in real terms will also have fallen. If you were to take your 100 and invest it something with growth potential for 3 years, you could even end up with considerably more than the 100 when it s time to pay. 13

14 So, taking it back to our scenario, if your money is locked into an asset such as a vehicle, there s nothing you can do about that loss of value which will be compounded by the depreciation of your asset. However, by renting you can invest the capital you would have used for the vehicle and increase its value. Professor Cooke uses a discounted cash flow (DCF) rate of 15% to make his comparison. Given the current economic climate this is arguably too generous but even at a more realistic figure of 10%, contract hire and longterm rental still out-perform purchase. There s also no allowance for the cost of borrowing in the purchase figures, which further enhances the argument for hire. The key to making your own price comparison is to look in detail at the hire options open to you, the benefits they bring and the ways you could invest your money if you chose not to tie it up in a depreciating asset. In our next guide, Options for Vehicle Hire, we ll be looking at the four principle routes of hiring LCV vehicles, giving you the information you need to make an informed decision. They are: LCV finance leasing LCV flexible hire LCV contract hire If you would like a copy of this guide sent direct to your inbox, sign up today. 14

15 About Burnt Tree As one of the largest commercial fleet operators in the UK, we ve got a lot of miles under our belt. Our national network of strategically placed locations means you can find us throughout the UK. When you choose Burnt Tree, you get the country s leading independent commercial vehicle rental and contract hire company on your side. Whether you need a fleet of vans for five years, a specialist vehicle built to your exact specifications or a car for a single day, we work hard to be the rental partner you can rely on. From the moment you call us, visit us or land on our website, you ll enjoy the best service we can give, tailored exactly to your business needs. You ll benefit from the expertise of a knowledgeable and friendly team, get help with choosing the right vehicles, and experience fast, efficient maintenance that keeps you on the road and cuts your downtime to a minimum. Our clients range from individuals and small private businesses to major blue chip organisations and local authorities across England, Scotland and Wales. So, whatever your needs, choose Burnt Tree for the right vehicles, the best service and a team that s dedicated to keeping you and your business on the move. 15

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