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F NANCING YOUR FLEET

15th January 2004
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Page 60, 15th January 2004 — F NANCING YOUR FLEET
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Which of the following most accurately describes the problem?

VVith bank rates so low, there's no time like the present to expand your fleet.. but how?

Steve Banner covers the options.

Hire purchase Hire purchase isn't just for buying expensive consumer goodies. It's a sensible way of acquiring a truck too, contends Willie Paterson, head of commercial vehicle finance at Alliance & Leicester.

-As far as many operators are concerned. its big advantage is that they get to own the vehicle once all the payments have been made, and they can claim capital allowances as well," he observes."They have to pay all the VAT up-front, which can place a strain on their cashflow. but VAT deferral schemes are available to help ease the burden." "We're certainly seeing a move towards HE" says Andrew Jamieson, UK marketing and rental director at Scania.

-Around half of the trucks we finance in Britain are subject to HP agreements, with contract hire making up the balance. Go back five years, and contract hire accounted for 70% of the total."

Finance lease However, if VAT remains an issue, then the customer can always opt for a finance lease instead. Under this type of arrangement VAT is paid on the monthly instalments, which spreads the load.

On the downside, the client doesn't end up owning the truck. It has to be disposed of once the agreement has run its course, but at least he or she can expect to get 95% to 97/0 of the proceeds. says Paterson.

That money,of course, can go towards a deposit on its successor.

One way of keeping payments down is to agree to make a balloon payment; write a big cheque, in other words. when the lease expires. Anybody who chooses that course however will have to ensure they have the necessary funds available.

rriple Choice k_11 mainstream financial products sprout varictions. and MAN Financial Services has come ip with a package called Triple Choice. "It's an HP deal with a difference," says chief 'xecutive Elliot Lennick."At the end of the ,greement the customer can either buy the ruck at a pre-determined value, extend the .greement and amortize it to zero, or return it o us and walk away."

HP and finance leases have to be shown on he customer's balance sheet.That can be a lelp or a hindrance, depending on the firm's iverall financial position and whether or not it ieeds to show it has some assets.

if off-balance-sheet finance is a key requirenent, then a company can always opt for ,nother form of lease instead: contract hire.

:ontract hire

Around 60% of all customers who take viAN's funding go this route," says Lenniek. They should bear in mind, however, that a ontract hire agreement should be shown as an ingoing liability in a footnote to the accounts. Again,VAT is paid on the monthly rentals, vith the size of the payment calculated with eference to the interest rate prevailing at the time the agreement started. the truck's projected mileage and second-hand value, and the nature of the work the customer does.

"The operator doesn't get to keep the vehicle, and it's the lessor who takes the risk on the residual," says Paterson."It's possible to vary the size of the rentals in line with the rise and fall in interest rates, but that's not something that's very popular.

Given that interest rates are at a historically low level, and the only way they're likely to go is up. that's scarcely a surprise.

Fixing the rate now means you'll reap the benefit when the cost of money rises. You'll also know for sure what your outgoings will be for a good many months to come. and that's a valuable aid to forward financial planning.

-That said, something we have seen increasingly over the last few months am owner-drivers using HP or finance leases a request for accelerated payments durin the first two years of the agreement," say Mike Owen, Commercial Vehicle Financ general manager.

"If they've bought a new truck then it's likely that it will come with a two-year warranty and maintenance deal,so regular servicing and major component failures wi be covered and they won't have to carry tip cost themselves.he continues. 'They will, however, once the deal has expired, and it'5 then that they'll need lobe in a position to meet any unexpected bills."

It's worth noting that Chancellor of the Exchequer Gordon Brown is proposing t( review the way corporation tax is applied. This could involve switching the ability to claim capita" allowances from lessors to lessees, says the British Vehicle Rental an Leasing Association (BVRLA).

This will mean lease payments go up, but true cost to operators will be no more than is now because of the capital allowances tit will receive.

Cheap loans

Whether on HP,finance lease.or contract hire, all the cheap money that's sloshing around means profitable operators can afford to acquire more expensive trucks— pricier second-hand ones in particular — than they could a few years ago.

-They're spending t130,000 on a used truck rather than the £10,000 they might have spent in the past because they want to get hold of a newer vehicle that's more fuel-efficient and requires less maintenancesays Nick Watts, a director of finance broker Avelease."We're also seeing deals done over longer periods — three to four rather than two to three years. "It's worth noting that it's now impossible to get finance on a truck unless you can produce an 0-licence," he adds. Finance companies won't advance funds only to have the vehicle impounded because of illegal use.

Recharges

Truck operators are often wary of contract hire because they fear they'll be charged for every minor chip and scratch when the truck is returned to the lessor for disposal.

Such fears aren't groundless. "There are undoubtedly companies out there that price cheaply to win contracts, then hammer the cus tomer over recharges," contends David Smit managing director of Lex Transfleet. Howeve all reputable contract hire companies now class these and other small blemishes as fair wear and tear.

That's not to say that huge dents in cab doo and badly torn seat cushions won't attract a financial penalty.They're classed as damage th shouldn't occur in the normal course of even and that should have been rectified prior to th vehicle's return.

The BVRLA produces return guidelines adhered to by many leasing companies, and some use engineers from the FreightTranspo Association or the RAC to inspect vehicles.

Reassignment and disposal

Companies contemplating contract hire may also worry that they'll be stuck with trucks the can't use if they're faced with an unexpected downturn in work.

"If a firm loses a distribution contract to a rival logistics group that needs vehicles then we're always prepared to consider reassigning its trucks to its competitor." says Fraikin boss John Ball. "Alternatively, we may be able to switch them to our rental fleet, depending on their age and specification. If that's the case, then all we'll do is ask the customer to cover the cost of repainting them."

Suppose they have to be disposed of?

"Then we'll look to the operator to pay the difference between their book value and their market value," says Ball. What Fraikin doesn't do, he stresses,is demand 100% of the rentals that would have been paid had the truck remained with the client until the end of the agreement.

"If you shaft a customer then he won't do business with you again." remarks Tim Josse, Hill Hire's sales and marketing director.

This is where the source of the lessor's own funding can he important.

Funding

At Fraikin we self-fund. so how we work with customers to mitigate our losses is at our discretion," Ball observes. A lessor using orrowed money doesn't joy quite so much flexibility, e adds.

If the operator wants to eep doing business with the :;ssor, but wants to, say, shift ut of 18-tonners to 7.5miners because the pattern f the traffic he handles has hanged. then most lessors will o all they can to help without Tiposing steep financial penlties." We negotiate and try o reach a fair and reasonable .greement," says Smith.

Aaintenance

:ontract hire can be arranged either without a: with maintenance. Go the latter route, and he monthly payment will be increased to over all services and most repair work plus tatutory inspections.

Replacement tyres can be included too, Lot to mention breakdown recovery and /chicle Excise Duty. So can a temporary eplacement vehicle if it takes a long time to omplete a repair.

Its much less common for fuel and drivers o be provided however.

Many operators want to be able to keep rack on line of what's happening to their 'chides. Lex Transfleet. for example, offers a ystem called Vision that allows them to do so. Repairs that may not be included in the greement include things such as replacing a ■ ent bumper or a shattered headlight. Some ontract hire companies have a nasty habit of zvying wildly excessive charges for such work, o it makes sense to get a clear idea of what the Price of some of these jobs is likely to be before ny agreement is signed.

"Our customer charter gives examples of vhat we would charge under such circumlances." says Smith.

-Don't forget that anything from 11% to :2% of the vehicle's service and repair costs nay not be covered by the maintenance conract," warns Taylor.

Make a third party responsible for your naintenance.and your 0-licence could be in !opardy if a thorough job isn't done.

"So choose the firm you're going to do busiLess with carefully," Ball advises."Speak to one ir two existing customers, and make a point if visiting the local branch and talking to the people who will be dealing with your vehicles." Companies such as Fraikin are usually villing to buy a firm's existing fleet and lease it hack to it under a contract hire deal. Such an arrangement can provide the lessee with a valuable injection of capital to invest in property or factory equipment; hut it's not open to everybody.

"The trucks must have been well-maintainedwe won't buy a bag of nails-and we'll do it only if the firm concerned is financially solid," Ball says. He sees little point in signing a sale and leaseback agreement with a company that desperately needs cash to stave off receivership.

Self-drive hire Taking a truck on long-term up to a year -self-drive-hire is yet another option. II provides the ultimate in flexibility because the vehicle can be returned at any time with no penalty. Such flexibility comes at a price, however. -Typically, you pay a 15% premium on contract hire rates, and you may not get a truck that's tailored to tit your precise needs," Ball says.

"It will have to be built to a fairly standard specification to make it easier for the hire fleet to rent it out again."

Payment on use

Payment-on-use schemes have been mooted over the years, and developments in telematics certainly make it easier to track vehicles, note the mileage, and bill the haulier accordingly.They've yet to take off, however.

"The trouble is that the lessor needs some sort of guarantee that the operator will cover enough distance to meet his I ixed cost," says Lennick. "As a consequence.payment-on-use may be no cheaper than conventional contract hire."

Why not simply opt for a straightforward bank loan? Well. you could; but it could land you in unexpected difficulties, Watts warns.

"Borrow £30,000 and make full use of your overdraft, and you may find that the bank won't be too happy about advancing L.3.500 to fix a major component that's failed," he contends. -It will feel over-exposed."

If you've got funding from another source, then the bank will still be there as a line of credit should you need it in an emergency.

Buying outright loday's low interest rates are prompting some operators to pay cash assuming they've got it for the trucks they need. "Their money earn very much on deposit,so it's not a b idea,-,Jamieson comments.

Some larger own account fleets are ce buying outright either using their own I or cash raised on the City money markei employing a fleet management compan: provide the operational expertise they ri Small operators might be better advis. hang on to their pennies, however.They need them to cover, say. a bad debt if a fr, forwarder goes under: and trucks are of depreciating assets.

03/4 finance

Ultra-low interest levels don't seem to h minished the appeal of 0% finance. Such ages should be examined carefully, how( warns one well-placed industry insider.

-You don't get anything for nothing, a you may find that you can buy the trucki the subject of this never-to-he-repeated lot cheaper elsewhere," he observes. •