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Leasing Commercial Vehicles

17th July 1964, Page 71
17th July 1964
Page 71
Page 72
Page 71, 17th July 1964 — Leasing Commercial Vehicles
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Which of the following most accurately describes the problem?

WHILST tradition is readily associated with the financial world, and banking in particular, even these long-established institutions have their internal revolutions. Thus, for many years there was a clear distinction between credit financing and banking. Then five years or so ago the leading banks took substantial interest in credit and hire-purchase finance houses, so giving their support to this new and rapidly expanding branch of finance.

Will leasing similarly now enter a phase of rapid expansion and universal acceptance? If it did it could have a substantial bearing on the future pattern of the road transport industry. Recent interest shown in municipal circles is indicative of such a trend.

Naturally, ways and means of obtaining the necessary equipment—in this case commercial vehicles—must have a substantial bearing on discussion when any new project is under consideration. In road transport, however, such consideration will also be conditioned by the effect of licensing. Thus, passenger vehicle operation falls into two groups, service operation or private hire and tours work. Such divisions would normally determine not only the type of vehicle required, but also the period over which it could reasonably be expected to run. This, in turn, would determine to a large degree the type of finance facilities required to meet the needs of individual cases, assuming that cash reserves were not available to make outright purchase.

In haulage the corresponding situation is more complex. First, there is the division between the ancillary users of transport, where a trader carries his own goods, as opposed to the professional haulier conveying other people's goods for hire or reward. But superimposed on this licensing distinction there are other variations, dependent upon the ownership of the vehicle and the employment of the driver.

So the ancillary user, in the extreme case, could buy his vehicle outright, employ his own driver and deliver his goods under C licence. The same would apply if the vehicle was obtained on hire-purchase or on lease. Whilst not directly concerned with ownership and licensing, in all these three cases maintenance can either be undertaken by the trader or, alternatively, done by an outside garage, which may well be the agent or distributor who supplied the vehicle.

An extension of this latter arrangement would be for a contract hire specialist to supply a vehicle to the trader on contract, which the trader would then utilize exclusively as he required, including the provision of his own driver. Under such C-hiring arrangements the trader is not only relieved of the responsibility of maintaining the vehicle, but also the financing of its purchase, its careful selection and subsequent replacement.

Where the employment of the trader's own driver is not of paramount importance, it would be possible for him to hire a vehicle and driver exclusively for his own use from a haulier or contract hire specialist operating under a Contract A licence. Finally, where a competitive haulage rate was the first consideration, the trader might consider that the service provided by a professional operator engaged in general haulage met his needs. In that case his goods would be conveyed under A, or possibly B, licence, with the professional operator again providing both vehicle and driver.

An Unfortunate Connotation

Against this background of alternative methods of providing vehicles for commercial purposes, the opportunities for a relatively new method—namely, leasing—will be considered. At the outset it must be said that the very term " leasing " has, in the minds of many, an unfortunate, if illogical, connotation. Yet the principles of leasing have been readily accepted by everyone for many years when applied to house property. With justification, protagonists of leasing maintain that it is therefore a peculiar trait at the same time to hold the view that when leasing is applied to equipment such as vehicles it becomes a dubious method of finance.

The timing of accelerated interest in leasing in this country is significant. Comparable with the expansion of hire-purchase, there is good reason to believe that leasing will follow a similar trend. Because this country, particularly in financial matters, is conservative or even ultra-conservative—to advantage as well as disadvantage— we tend to follow trends in this field after the U.S.A. But even for that country the expansion of leasing over the past decade has been phenomenal. One company had 370 lessees (i.e., customers) in 1957. Five years later it had 11,375 lessees.

Whilst the rate of expansion may not be so rapid in this country, it should not be overlooked that hire-purchase similarly got off to a slow start in the U.K., although now it is universally accepted.

In endeavouring to arrive at a balanced view as to just what leasing has to offer to hauliers and ancillary users, B25 it is important to adopt the right approach at the outset. Whilst comparisons are a natural means of arriving at evaluation, they must be valid comparisons. In this context the prime objective should be to establish whether the facilities 'offered under leasing match up to the individual circumstances better than those provided by other means, rather than a direct comparison of the advantages offered by any two methods of credit finance.

The basic factor of leasing is the distinction between owning -and renting. Whatever importance may be attached to pride of ownership in a personal sense, this aspect is totally irrelevant to commercial activities. Whether p.s.v. operator, ancillary user, or potential haulier, the fundamental requirement of them all is the opportunity to use the vehicles rather than own them. Admittedly, ownership provides the opportunity to use, but nevertheless ownership is, economically, a secondary consideration. Maximum utilization is the prime objective.

Credit finance in all its forms is basically an individual transaction between two parties. Consequently, any generality applied to credit finance could be misleading. Ultimately, in any particular transaction the credit worthiness of one individual or company is the prime determining factor. Nevertheless, leasing could be said to have particular attention for the larger user. In contrast, some, though not all, smaller users or owner-drivers might have difficulty in establishing credit rating sufficient for leasing, although sufficient for hire-purchase. indicative of those already leasing commercial vehicles are wholesalers, fuel distributors, civil engineering contractors, departmental stores and similar large-scale organizations.

Cost—an Important Factor

In the majority of the cases the actual cost of leasing would always be an important factor, although not necessarily the prime one. Conservation of capital resources for more urgent or important use is often the first priority. Even though large organizations could be expected to be in a position to buy their commercial vehicles outright, if they so wished, this possibility could be misleading. In fact, they are often utilizing bank overdrafts, however secure, to do just this and so, in fact, are merely using another form of credit finance. It is significant that many existing users of leasing have been converted to this form of credit finance after previously buying their vehicles for cash rather than from conversion from hire-purchase.

A stimulus to this changing trend has undoubtedly been a spate of credit "squeezes ". On such occasions many organizations have been reminded of the folly of ignoring an established financial precept, that long-term commitments should not be financed with short-term money. Thus, on the occasion of a previous credit squeeze many companies found that they had considerable sums tied up in fixed assets when their banks required repayment of short-term loans.

In contrast, once a leasing arrangement has been agreed, the client can concentrate on making the optimum use of the equipment so obtained in the assurance that he is committed not only to a fixed amount, but also for a stated period.

Dependent upon the type of vehicle, conditions of proposed operation and individual credit worthiness, a reasonable period for the leasing of a commercial vehicle could be five years. In leasing terminology this would be considered the primary period when the finance company is concerned with recovering capital costs and servicing charges. Then, if both parties were in agreement, a second period could be arranged with subsequent reduced or nominal rents.

Because transport is a service industry it must follow B26 closely changes and developments in trade and industry. It would not be exceptional, therefore, for a transport operator to find that a different type of vehicle would suit his changed circumstances better, although his existing one had by no means completed its normal span of life. Inevitably, whatever method of acquisition had been employed, some cutting of losses would, unfortunately, be necessary if it were decided that, on balance, a change of vehicle would nevertheless be the more economic policy.

On such occasions a change could be more easily made under a leasing agreement as no capital sum, either by way of complete purchase of the second vehicle or, alternatively, hire-purchase deposits, would be necessary. Where leasing applied, the sum recovered from the sale of the first vehicle would be reflected in future rentals payable on the leasing of the second vehicle.

Cutting of losses in such circumstances must always be a difficult decision to make. But where leasing of vehicles did not apply there could well be many instances where the non-availability of capital resources made it impossible to effect a policy which had been demonstrated as the more economic in the long term.

It is also contended that leasing can prove beneficial in cultivating a more realistic approach to business generally. Having, for example, considered and possibly agreed to a leasing rental of, say, £40 a month, then the user of the equipment has a clear target above which he must earn revenue to justify that equipment. Where ownership— outright or through hire-purchase—applied, this clear-cut target is not always so readily discernible. The very fact that equipment is one's "for keeps" could be, though not necessarily so, psychologically opposed to the urgent economic necessity to make maximum use of such equipment throughout every working day. The incidence of leasing rentals is a continuing reminder of the need to get maximum utilization from any vehicle so acquired.

Further aspects of leasing of commercial vehicles will be considered in this series next week.


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