Methods of vehicle
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ACOMMON way of entering the road transport industry is by buying a used vehicle on hire purchase. Many of today's large and successful operators started like that. But then many who started with a used vehicle ultimately failed to stay the course. There may well have been various reasons for their failure and one of these could have been failing to realise the effect on operating costs of running a used vehicle.
When discussing this subject last Week I stressed that the immediate saving of several hundred pounds as the difference between the price of a used vehicle and a new one could loom so large in the intending operator's mind that it obscured the ultimate effect on operating costs. After all, in long term this is the more important factor.
Compared with entry into road transport in the pioneering days of the industry, potential operators today have a wider range of finance credit facilities. Correspondingly the opportunities available to acquire a new vehicle instead of a used vehicle, despite limited financial resources, have increased.
Many existing operators expand their business by this means and an operator who runs into difficulties in such circumstances normally does so for reasons other than the fault of the credit finance facilities themselves. One such reason is failure to distinguish the clear difference between repayments under a credit finance arrangement and the cost of operating the vehicle. This difference can be further complicated in the mind of the newcomer if he has not acquainted himself with the underlying principles of operating costs and, in particular in this case, the distinction between what might be termed "immediate" operating costs such as wages and fuel and "deferred" operating costs such as licences, insurance, tyres, maintenance and depreciation.
Confusion can arise In this latter list I have purposely omitted the item of interest because here again some confusion can arise as between interest as an item of operating cost and repayments under a hire purchase or similar finance arrangement. I can best explain this by first considering the case of an intending operator who has sufficient money invested to buy the vehicle he has in mind outright. Presumably he would have been enjoying interest on his capital by way of investment which will be lost once he purchases his vehicle. Therefore until, along with other items of operating cost, the corresponding amount is met as a standing cost under the item of "interest" he cannot be considered to be making a profit. Indeed if he did not earn revenue over and above the amount of interest then he might just as well have left his capital invested and not entered into haulage, at least as far as financial awards were concerned.
However, when an operator commences with a vehicle acquired with the assistance of credit finance facilities and subsequently meets all the required-repayments, he is in effect accumulating his capital after he has purchased his vehicle as opposed to the other operator who acquired his capital before he purchased his vehicle. In the total hire purchase repayments, however, there will be consolidated both the capital repayment and the interest charged for the credit facilities. It is this latter amount which corresponds to the item of interest as a standing cost and only that which should be so included.
Because of the widespread economic difficulties currently applying, with all forms of capital investment hampered by a severe credit squeeze, Mr. A. N. Williams, an area manager with Lornbank Ltd., Exeter, recently made an opportune assessment of the alternative methods of financing the purchase of commercial vehicles which I now summarize here.
At the outset Mr. Williams rightly admits that undoubtedly the cheapest method of purchase is for cash, but with a severe credit squeeze of unknown duration in force, cash purchases tend to make great inroads into working capital at a time when it is very difficult to replace.
Secondly, cash purchase may adversely affect the liquidity position of a company and leave too small a reserve in hand to cope with the emergency operations. Thirdly, Mr. Williams enumerates, it should be remembered that cash so used, always has an alternative investment value and that this may, in many cases, exceed the cost of financing vehicles by hire purchase or leasing contracts.
Regarding a bank overdraft, the majority of such facilities by their very nature are repayable on demand and it is wiser, therefore, to use them for day-to-day working capital rather than for investment in capital equipment for which payment needs to be spread over a period.
Moreover, overdraft facilities are immediately affected by any tightening of the credit squeeze and, in difficult times, may be reduced or withdrawn at comparatively short notice. If used to buy capital equipment one's bank-borrowing powers, in times of emergency, are reduced by the amount of such capital expenditure. A further point regarding bank overdraft is that the interest rate varies with the bank rate and likewise the scale of repayments, thus making exact budgeting more difficult.
Hire purchase, Mr. Williams claims, is a method which has been tried and proved over many years. For commercial vehicles, and particularly fleet users, the additional cost is less than it is for private cars. Hire purchase is not affected by Board of Trade controls, except in respect of trailers or semi-trailers, with the result that the initial deposit and period can be tailor-made to suit the individual user. The Board of Trade, Mr. Williams adds, has granted to the large national finance houses special licences giving exemptions from control which permit them to negotiate the terms on which the finance of trailers and semi-trailers can be arranged.
A hire purchase rate is fixed and does not vary with bank rate. The exact monthly commitments are known for the full period of the contract thus making budgeting comparatively easy. Also the amount outstanding on any contract cannot be reduced or withdrawn as a result of any tightening on the credit squeeze. Hire purchase finance leaves one's working capital or bank overdraft availability intact or alternatively allows one to take advantage of the yield from alternative investments of cash resources.