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Page 40
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TO RENT
We take a look at the pros and cons of buying, renting and leasing, and give a guide to avoiding the financial pitfalls of renting a trailer.
• The trailer rental business is in turmoil. Many new entrants to the market, big players buying huge new fleets of trailers, and a market picking up more slowly than many expected, have combined to push down rental rates. Even the big boys admit rates are not progressing.
People paying £80 per week for an existing rental trailer have been astounded to receive offers of new trailers for only £64 per week from rival rental firms. But having accepted lower rental offers, the hirer sometimes finds a sting in the tail from heavy back-end charges.
Rental is not just about pounds per week—it is also about terms and conditions. Customers must check newlyrented trailers for any damage, and also check the small print on wear and tear. One man's fair wear and tear is another man's excessive damage, possibly warranting a heavy after-rental bill for an unsuspecting operator.
Customers also need to know whether they are being charged for tyre wear.
Many companies look for an average of 18% return on capital employed, and if they get their finance to buy trailer fleets at 14.5% that leaves them a 3.5% margin. How they achieve their averages varies.
Some include an annual charge to allow for the trailer's mid-life refurbishment and others put in a block charge at five years. Others put in extras such as a service charge "per axle" to allow for MOTs, tyres and so on.
Some might make extra charges if customers want replacements when their hired trailer is off the road, and they will want to make a charge to cover overheads. Some charge extra if customers want to pay their rental charges in arrears.
lithe costs for a rental company include the costs of sales, management and the like, it seems unlikely that many rental companies know their own costs if they can go in at front-end rental rates practically 20% lower than their competitors.
Spot rental should, on a very rough calculation, be at least 2100 a week for the rental company to break even on its operation. But some firms are now charging 285 per week, In those circumstances, the only way to make a profit is either to try to recoup money at the end of the rental or to play ducks and drakes with depreciation. Alternatively, rental companies could run older, fully written-down kit, and add some depreciation costs to the rental charges on those vehi des, thereby making a paper profit at least.
At the moment, rental is by far the cheapest method of acquiring a trailer and if customers are good at managing their businesses they can save themselves a lot of money by going that way. If he buys outright, the customer faces interest charges, maintenance and MOT charges, depreciation allowance and tyre costs.
If he borrowed 214,800 to buy a trailer at a 15% interest rate, it would cost .249.80 a week to start with, or more like £68 per week because interest charges are more in the first year of a loan agreement. There would, of course, be lower maintenance costs in its first year.
WEEKLY CHARGE
Allowing .&:70.98 per week average interest and 2240 maintenance on the first year, that would give a weekly charge of 273.18'. But as the operator could be earning £22 per week interest if he invested the 214,000 in the bank, the true cost of purchase would be 295 a week. And he can rent a trailer for less.
Another advantage is that buying means the customer has to keep the trailer for 1.0 years—by renting he can keep the trailer only as long as he needs it.
Some of the trailer majors are starting to push the advantages of operating leases or full contact hire in order to obtain trailers. The rationale behind a contract hire or operating lease deal is extremely simple.
Payments by the trailer operator qualify for 100% tax relief as an allowable business expense. And in an operating lease, the residual values risk is still taken by the hiring company so the user has no worries about balloon payments or administration. Operating leases also satisfy accountants' requirements as they can be kept off the company's balance sheets. The strengths of the rental companies lie in their abilities to pass on the benefits of bulk buying, technical expertise and market knowledge to the operator.
Contract hire is an operating lease with extra services such as maintenance, administration, tyre replacement, MOTs and sometimes a mid-life refurbishment and repaint. A company opting for an operating lease or contract hire can undoubtedly save money compared with outright purchase.
Estimates by major contenders such as TIP suggest operators can save 10% of the original purchase price on buying discount and early delivery, 10% of the secondhand price on reduced depreciation through better resale prices, up to 90% of administration costs, and up to 15% on finance costs.
Also, risks are spread differently because the rental company takes some or all of the risk compared with purchase, where the operator takes all the risk.
TIP has set up a specialist leasing division to take advantage of tax changes through payment adjustments, and to stress to potential customers the dangers of coping with changes in legislation.
It is unusual for companies to be granted leases of longer than five years, though some big customers might get a seven-year deal. Interest would be at least 11% on the lease and could start at 13% for a lease purchase. Add advance charges of probably 2700, and a trailer that at the end of the deal is still not yours, and the deal does not compare favourably with rental at current rates.
The time to take advantage of the rental market is now. There have already been mega-mergers between major rental companies and more could be on the way, which will almost certainly lead to rental rates creeping back up.
In any case, it certainly pays to keep checking on the deals which are on offer — a good businessman could save his firm money in these tight financial times by acquiring trailers for less than had been planned. 0 by Andrew Williamson