THERE'S A LOT IN VEHICLE LEASING
Page 51
Page 52
If you've noticed an error in this article please click here to report it so we can fix it.
Some Current Schemes examined by E. J. MILLEN HOW great an impact will commercial vehicle leasing have on operators in the next year or two? Judging by the interest now being taken in the subject by commercial vehicle manufacturers it seems likely that the impact will be quite considerable. So far as operators are concerned, the big question is: "What's in it for me?" This is what I set out to discover.
Two major manufacturers, Scammell Lorries Ltd. and Leyland Motors Ltd., have announced vehicle-leasing schemes during the past six weeks, and there is no doubt at all that further such schemes will be announced shortly. It is understood that A.E.C. Ltd. is already operating a leasing scheme which will be fully publicized in the immediate future. Seddon Diesel Vehicles Ltd., I am informed, is also considering a scheme which may well be operative this summer.
In Britain the concept of leasing plant and equipment is not a new one. There has indeed been quite a lot of activity in this field by interested finance companies during the past two or three years. But if the American experience of this type of commerce can be taken as a guide our experience of leasing to date is negligible compared with the volume that we shall witness, say, by 1968. In the United States $10m. of leasing business in 1952 mushroomed to 5400m. in 1960; by 1965, it is estimated, the figure will be in the region of $1,000m.!
The really novel aspect of the development of leasing in Britain in recent years has been the appearance of financial institutions which buy equipment and rent it out, having no interest whatever in the equipment as users. Their service Is purely a financial one.
FLEXIBILITY There is no reason why an operator wishing to avail himself of leasing facilities should not make his initial approach direct to the finance company of his choice. Alternatively he may go direct to a manufacturer or distributor, either of whom will then contact the finance company. A spokesman of United Dominions Trust Ltd. emphasized that flexibility was the essence of a leasing arrangement and that the finance company would seek to give maximum possible assistance to a customer. This would, certainly be the case where an operator required to purchase bodies separate from chassis. In such circumstances the customer might, subject to his credit standing, purchase what he considered he required. The finance company would then draw up a leasing contract to cover the total expended by its client. It would be expected that the total sum involved in the lease would be the total sum appearing on a client's invoices, the customer (operator) receiving the benefit of any discount which he might normally expect to receive from the manufacturer or distributor.
What of the terms of a leasing agreement? These are liable to vary slightly from one company to another, but usually an initial contract is drawn up which will have a life of from three to 10 years, depending upon the estimated working life of the equipment concerned. Rentals have to cover the capital cost of the equipment plus the financial charges within the term of the lease. The capital cost of the equipment is thus spread over as long a period as is possible and the operator is not obliged to pay for equipment which is uneconomic to run. A point of interest here is that if, during the term of the lease, the equipment should become obsolete it can be traded in for a new model; in these circumstances most, but not all, of the trade-in value will be reflected in the leasing charges for the replacements. Should the reverse apply, however, and the equipment is fully functional and useful at the end of the lease, the operator is usually able to retain it at only a nominal rent.
It is not only the estimated life of the equipment, but also the policy of the individual finance company, which determines the life of the lease. For example, the Mercantile Leasing Co. Ltd., which developed the York Trailer scheme in conjunction with York, favours a threeto-five-year standard term. The Equipment Leasing Co. Ltd. (associated with the Scammell plan), on the other hand, nominates a period of from three to 10 years—and transactions of a minimum of 11,000. The company operating the Leyland Motors scheme, United Dominions Trust, also specifies a leasing period of from three to five years, but a representative of this company told me that a minimum transaction of £5,000 was required.
THE RATES
There is also some variation in the finance companies' approach to rates. Some prefer to work on a flat-rate system, bearing in mind that a fundamentally attractive element in leasing is that of the known annual cost. But under another popular System rates are reviewed once a year and an adjustment made dependent upon any movement (upward or downward) in Bank Rate.
The profits of the leasing company come entirely from the initial contract, so that at its termination the company is normally prepared to renew the lease at a nominal charge (likely to be in the region of per cent per year). Some finance companies will accept offers to purchase the equipment at the expiry of the lease, but no question of purchase can be raised until that time or the tax advantage to the operator under this type of scheme is entirely destroyed. A most important aspect of leasing schemes is that the leasing payments are wholly tax deductible—whereas hire-purchase payments are not. It is largely by virtue of this, coupled with the fact that usually no deposit is required under a leasing contract, that the leasing companies are able to claim that leasing is cheaper than both direct purchase and hire-purchase. In certain circumstances, though, a deposit is required by a leasing company —for example, when there is some question as to a client's credit rating. Furthermore, not all finance companies demand a deposit from their industrial clients under hire-purchase agreements.
USING CAPITAL
A point that leasing companies tend to stress in their publicity is that a company hiring capital equipment may offset its leasing charges against its trading profits. They also emphasize that capital. released through leasing, rather than direct purchase, can in very many cases be utilized more profitably in other directions. It might well be thought, therefore, that leasing schemes would prove of the greatest value to fast-expanding industries. So far as vehicle leasing is concerned, it would seem to be a particularly attractive proposition to companies to whom transport is little but a necessary and expensive evil!
Hiring equipment for a comparatively short term has long been an accepted practice in industry. This is a different type of arrangement designed to meet a different need—usually only a temporary one—often for specialized equipment. The usual type of contract hire scheme would normally be more expensive than leasing, as could only be expected, as in most cases the former includes servicing and maintenance and the provision of replacement machines in the event of a breakdown. There is no question of maintenance under a leasing agreement. Contract hire appears to be much better suited to a small company without servicing facilities or reserve equipment.
What are the likely advantages of leasing to commercial vehicle manufacturers? These, at first sight, appear threefold, namely: (a) immediate sales to potential customers who would otherwise defer purchase; (b) increased sales to customers who would otherwise be restricted in their buying by shortage of available capital; (c) avoidance of problems connected with financing or extended payment terms.
The immediately apparent benefits of leasing, to the customer, appear to be: (a) he can utilize more vehicles—without capital expenditure; (b) working capital otherwise invested in vehicles can be released for more profitable uses; (c) simpler budgetary control can be achieved through fixed payments at regular intervals, as rentals are payable in equal instalments: (d) no deposit is required; (e) the rentals are deductible in full for tax purposes; (f) leasing is an additional source of medium-term credit.
While considering the advantages of vehicle leasing to operators it is essential to make clear certain vital points.
First, the alternatives the operator might expect to have at the expiry of the lease. These are: (a) he can extend the leasing arrangements for an indefinite period at a nominal rental; (b) he can make the finance company an offer to purchase outright; (c) he can request replacement of the vehicles, in which case the finance company will consider refunding the net proceeds of the sale of the old vehicles. Secondly, maintenance and insurance are normally the responsibility of the user. Thirdly, the vehicles remain the property of the finance company. It is usual practice, in order to facilitate registration and insurance claims, for the vehicles to be registered and insured in the name of the customer.
As regards the amount of the rentals to be paid, it is perhaps appropriate to consider figures relating to the scheme recently announced by Scam melt Lorries Ltd. Under this scheme rentals are calculated on the following alternative bases: 60 monthly rentals of 2-000 per cent of cost.
84 monthly rentals of 1-525 per cent of cost.
120 monthly rentals of 1-200 per cent of cost.
Examples of commercial vehicle leasing figures in the simplest terms are as follows: I. Vehicle costing £10,000, leased for a period of five years Rentals
60 monthly payments of £200 £12,000 deduct: Taxation at 10s. 9d. £6,450
£5,550
Here it will be seen that for an expenditure of £50 per week new vehicles can be acquired to the value of £10,000— with tax relief equal to £25 per week. Z. Fleet of vehicles costing £100,000,
leased for a period of five years Rentals 60 monthly payments of £2.000 .. • • £120,000
deduct: Taxation at 10s. 9d. £64,500
£55,500 In this case for a monthly cash expenditure of £2,000, the leasing plan will free fixed capital of £100,000—with tax relief equal to £12,900 per year.
In making the comparison between leasing and hire-purchase it should be borne in mind that under hire-purchase agreements capital allowances and investment allowances (30 per cent) are received and that there are also tax allowances for the hire-purchase charges. A deposit is sometimes demanded—and there is an
option to purchase in the agreement. In the case of leasing there is no question of capital and investment allowances. A der-sit is invariably not required and there is, under the contract, no option to purchase.
A rather different type of leasing arrangement has been conducted for some years by Ford and Slater (Facilities) Ltd.. Leicester. The main point of difference is that it is not the vehicles themselves that are leased, but rather the depreciation on the vehicles. The full value of the vehicles is not paid by the client over the period of the lease—only the estimated depreciation on the vehicles under the contract being payable. The estimate of depreciation is based on the period for which it is required to work and the nature of the work to be undertaken. Apparently this scheme has been in operation in its present form since 1953. Under this plan vehicles may be replaced before repair bills become due, allowing fleet operation to remain economical. The scheme, which applies throughout the U.K., is arranged so that vehicle types can be changed to suit operating conditions.
On a three-year contract of this type the rent would be around £25 per month for £1,000 of value, varying slightly from vehicle to vehicle in accordance with the piedicted depreciation over the contract period.
A factor of some consequence here could be that rather less would be required of the operator as a security risk. In the case of the normal type of leasing scheme prospective customers are considered very carefully with regard to their credit rating.