August 8, 2017

Choosing the most appropriate funding method for your fleet

Choosing the most appropriate funding method for your fleet

A guide to help steer you through the funding maze

Company cars can be expensive to operate and, for most companies, are typically the second or third most expensive cost centre after salary and pensions. Selecting the most appropriate funding method for your fleet is therefore of paramount importance.

Various funding methods are available, each of which has its own features and benefits depending on a company’s operational objectives, and its accounting and cash flow requirements.

To help navigate through this vehicle funding maze, we have produced a comprehensive guide to the most popular and commonplace funding methods in use today.

It’s available for you to download here


What does the funding guide contain?

The new funding guide looks at the most popular vehicle funding methods in use throughout UK plc’s and explains in a clear and unequivocal way, the pros and cons of each method.

vehicle funding guide

For example, the guide explains that the most popular type of vehicle leasing, contract hire, allows a lessee or user to hire a car for a set period of time and pre-determined mileage at fixed monthly rentals.

There is no option to purchase the vehicle and at the end of the contract it is returned to the leasing company, who bears the risk on its disposal.

The guide also explains that the choice of vehicle can be a major factor in the monthly rental paid. For example, two cars can have an almost identical list price, but if one has a much higher forecast residual value than the other, this will be reflected in a lower monthly contract hire rate.


Is a sale and leaseback right for you?

The guide also looks at the details involved in a sale and leaseback agreement, in which an organisation can sell its fleet of vehicle to a leasing company for a pre-agreed sum and then contract hire the vehicles back for a monthly fee.

In this way, the organisation receives an influx of cash – which may be important for expansion, investment or other purposes – and it gains the advantage of fixed, monthly fleet budgeting without the financial risks associated with vehicle depreciation.

It does mean that the vehicles are no longer an owned asset of the company, but if this is not an issue, this can be a very useful method for helping a company increase its liquidity.


Finance leasing offers risk and reward

The guide also considers the benefits of finance leasing, which allows the lessee or user to hire a vehicle for a fixed monthly fee, but also transfers all the risks and rewards of ownership of the vehicle to the lessee.

Using a finance lease means that the vehicle will appear on the lessee’s balance sheet, with outstanding rentals represented as a liability.

At a time of rising residual values, this can be an excellent method of allowing a company to share in the rewards from increased sales values. But companies should also be aware of the downside in a falling used car market.


Is contract or hire purchase right for you?

The guide also examines the pros and cons of contract purchase and hire purchase, methods under which the user agrees to purchase a vehicle via a series of monthly instalments.

At the end of a typical contract, the user can purchase the car for a predetermined amount – known as a balloon payment – as long as the terms of the initial agreement have been met.

Having gained title to the vehicle, the new owner can either keep it, sell it directly, commission the leasing company to sell it on their behalf or sell the car back for a pre-agreed sum, called a ‘guaranteed buy back’.

These types of funding methods appeal to companies that want to have ownership of their vehicles, but do not want to use their capital or overdraft to pay for them and want to avoid mileage restrictions.


Some still favour outright purchase

Some companies still prefer to own their assets rather than lease them – although the percentage doing this is falling as leasing continues to grow in popularity.

Vehicles purchased outright are usually regarded as the acquisition of a fixed asset for accounting purposes and, as such, are recorded on the organisation’s balance sheet.

However, funding a vehicle this way can mean tying-up capital in a depreciating asset, using money that could be invested elsewhere. And outright purchase can also make cash flow and budget forecasts tricky to produce, due to the unpredictability of the used car market.

If you would like to find out more about the major vehicle funding methods currently available, then please click here