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than variable, and an operating lease is offbalance-sheet finance. However,

5th May 2005, Page 52
5th May 2005
Page 52
Page 53
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Page 52, 5th May 2005 — than variable, and an operating lease is offbalance-sheet finance. However,
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Which of the following most accurately describes the problem?

a note has to be attached to the firm's accounts showing the agreement as an ongoing liability.The lessor claims the capital allowances.

If you have to terminate an operating lease early, brace yourself for a hefty bill. "It should be viewed as a noncancellable agreement," says Steve Durrant. MD of MercedesBenz's finance operation, Charter Way.

Penalties can range from being obliged to pay the difference between the vehicle's book value and its market value to forking out 60% or even 100% of the outstanding rental payments.

Penalties

For example,the penalty may be less onerous if only a handful of trucks are involved and their specification means they can easily be switched to the lessor's rental fleet —if it happens to have one—and the operator continues to lease other trucks in large numbers from the finance house concerned. No provider of funds wants to alienate a customer if it can help it.

That should also be the case if termination is due to the sudden loss of a distribution contract, and the vehicles can be reassigned to the logistics company that has won it.

Lessors will be considerably less accommo dating if the lessee simply wants to get out of the agreement because he's found a cheaper deal elsewhere.

Because of the risk of termination penalties many funders advise transport companies against relying exclusively on operating leases. Instead, you should acquire some trucks on HP, and rent some too.That way, if there's a downturn in business you can slim down your fleet by getting rid of the rented vehicles. You can return them at short notice without incurring a penalty.

Ti you still need to lose capacity, you can offload any vehicles you own outright because you happen to have paid all the HP instalments. You can also settle a few HP agreements early without taking anything like the beating you might take over early termination of an operating lease.

Many firms fear they'll be penalised for every minor stone chip and barely visible scratch when the truck is returned to the lessor. That shouldn't be the case if the leasing company complies with the Guide to Return Conditions issued last year by the British Vehicle Rental & Leasing Association and the Freight Transport Association.

Disputed areas Ask about the lessor's stance on return conditions before you sign any contract, and find out if it is willing to bring in independent engineers to adjudicate over disputed areas. Many are happy to do so.

Large dents in the bodywork, seats peppered with cigarette burns and radio/CD players that have mysteriously vanished will undoubtedly have to be paid for. But what happens if the vehicle simply clocks up a lot more miles than originally predicted? A pence-per-mile penalty will be imposed on the excess.

But if a number of trucks with the same specification are being returned at about the same time, it's likely that some will have done fewer miles than expected.Their shortfall can be used to counterbalance any over-run; a practice usually referred to as mileage pooling.

Not everybody is enthusiastic about this approach, however, arguing that the loss made on high-mileage trucks is rarely compensated for by the better prices their lower-mileage stablemates fetch. Our standard conditions don't allow pooled mileage," says Durrant.

Some agreements allow the operator to take advantage of a margin of free excess miles. but if you exceed that margin you're likely to be hit by a higher excess mileage rate han you would normally pay.

Operating leases on new trucks written by 2harterWay typically run for three to five rears." We don't offer them for less than two rears," Durrant reports.

The days of short-term agreements lesigned to boost registration figures are over, it least for now. They involved inflated secondland values that could never be achieved, vhich was a recipe for disaster.

Leases can usually be extended once they've tin their course and they frequently are, given tow long it takes for new trucks on order to be lelivered. The monthly payments often .emain the same or even fall, but they may ncrease if service and repair is included, to ake into account the higher maintenance :osts incurred by older vehicles.

Vlaintenance

'We're finding that people are asking for ;xtensions of anything from a month to two rears, although the usual period is from three o four months," says MAN Financial Services AD Elliot Lennkk.

An operating lease can be combined with a naintenance package and other support ervices to create a contract-hire agreement. Those services can include replacing tyres whenever necessary, ensuring the vehicle is taxed and tested, providing an emergency breakdown service, and arranging for replacement trucks.

A single,fixed monthly payment covers the lot, allowing the operator to predict a large chunk of his outgoings for several years ahead. Bear in mind, however, that any repairs not covered by the agreement can be pricey,so get a clear idea of what they're going to cost before work starts.

In Briggs's experience contract hire is often favoured by own-account operators who want to hand much of the day-to-day responsibility for managing their fleet to somebody else.

The problems associated with early termination are the same as with a straightforward operating lease.

Any penalties should be calculated solely on the finance element of the rental, but should not include the part that covers maintenance and other services.

Some leasing companies are willing to buy an operator's existing fleet then lease it back to him, providing the business concerned with a capital injection.

They're usually selective about the trucks they're willing to acquire, but are unlikely to be interested in a gaggle of 10-year-old tractors that have been to the moon and back, and will want to be sure that the capital is being reinvested in the business.

If you're simply trying to keep the VATman happy they'll back away quickly.

Sale proceeds

Finance leases still appeal to a minority of hauliers. As with an operating lease, VAT is paid on the rentals and the operator doesn't get to keep the truck. It has to be sold once the agreement expires. He's not allowed to buy it, but he can expect to enjoy as much as 97% of the sale proceeds.

That's the theory at least. But with some funders allegedly rebating as little as 80% of the proceeds when they dispose of the truck, it literally pays to find out how much you are entitled to before you sign the agreement.

Unlike an operating lease, a finance lease must be shown on the balance sheet — one way to keep monthly payments down is to make a balloon payment when the lease expires.

While most hauliers would assume that a finance company would be more than happy to fund all their vehicles, that's not always the case, says Briggs. Finance houses are wary of over-exposing themselves to any one risk and might set a limit on the funding they're prepared to provide, especially where smaller operators are concerned.

"They might be prepared to finance two or three,but not the lot." he observes."As a consequence, the average small operator may deal with two or three finance providers according to our research."

Business plan

They're also likely to want to know a good deal about the customer's activities before they start advancing large sums of money, and they'll need to inspect a business plan. "Questions such as 'where is your work coming from?' and 'what happens if you lose a key client?' will have to be answered," Briggs warns. "In this situation what we're really saying to the operator is 'help us to say yes', and we're more likely to do so if he is open, honest, and demonstrates integrity."

That means working within the law, he adds. Funders take a dim view of operators who don't maintain their trucks and flout the drivers' hours rules, and they'll certainly want to see the firm's 0-licence.They have no wish to see one of their trucks impounded by the authorities because the lessee is running without one.

Supposing the haulage company has a chequered financial history, including County Court judgements against it? Funding might still be available.says Briggs. hut only with a larger deposit and personal guarantees from the directors.

If you're proposing to go the contract-hire route you should be asking a few hard questions of your own. If the maintenance is going to be handled by a third-party workshop, you should visit it to ensure they are competent to early out the work, and ask to speak to a couple of existing customers.

Remember—it might not be your truck but it's still your 0 licence.

With companies such as Close Asset Finance, Bank of Scotland and so on interested in doing business with you, it pays to shop around. But don't be mesmerised by what appears to be the cheapest offer.

No doubt 0% finance sounds appealing, but there are likely to be strings attached. You don't get something for nothing..


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