Guaranteed car finance uk

If there's one aspect of company car management that is guaranteed to send fleet managers freefalling into a tailspin of confusion, it's car finance. The bane of many fleet managers' lives, the mere mention of the subject is enough to send them racing to the medicine cabinet for the family pack of super-strength Nurofen.

The problem is one of ambivalence. On the one hand, the vast majority of drivers embrace company car changeover time with all the unbridled exuberance of a child in a toy shop. Paradoxically, the company funding such decisions is rarely so proactive, rooted in age-old practices that rarely reflect the current position of the business.

So what's the excuse? More often than not, it's down to the brain-straining array of choices. According to the Lex Vehicle Leasing Rough Guide to Company Cars 2004 there are no fewer than six traditional fleet funding options available. Each of these have a different set of criteria, some so subtle that only the very best financial experts can comprehend. Outright purchase and contract hire are the most popular but there are other, more specialised schemes, notably hire purchase, finance lease and contract purchase. Then there's the cash-for-car route, which often involves personal contract purchase (PCP) and employee car ownership (Eco) schemes.

And that's the rub. There's no universal panacea to the fleet funding conundrum. Companies that dive in with cold feet tend to plump for the most popular options--often schemes that command the most column inches in the trade press--and can quickly lose out.

Robin Mackonochie, head of communications at the BVRLA, comments: "There's still a considerable amount of inertia in the industry and the reason most companies rarely consider change is because they think the alternative is too complicated."

So is the Holy Grail of the fleet finance world a fairy-tale fantasy?

Certainly not, but one thing is for sure: running an efficient fleet is a smiled operation. Before you even attempt to choose a particular funding option, you first need to address the question of whether to buy or lease the vehicles. Be careful: without a dedicated fleet manager, or at least someone with a modicum of accounting acumen, it can quickly become an expensive drain on valuable resources. Cashflow is the primary handicap here, Funds used to buy the vehicles will appear on the balance sheet and will affect any company's ability to borrow additional capital for other ventures.

The difference between leasing and purchasing comes down to ownership In a 'hire' arrangement, the lessor (contract hire company) retains ownership of the vehicles and therefore takes all the risk and reward that ensues. The lessee takes no risk in purchase, residual value or ownership, and the company can outsource the day-to-day administration to a third party. The cost can be spread over the life of the vehicle, and the lessee can tap into the buying power of the leasing company to enjoy even greater savings.

So which leasing scheme do you choose? There are literally hundreds of institutions offering a veritable Aladdin's cave of attractive deals, everything from Leaseplan to Lloyds TSB, plus a whole raft of car supermarkets, on-line retailers and 'back page' brokers. If you're new to the leasing game, the best advice is to go to one of the big hitters because they will enjoy the greatest economies of scale.

Still confused? The following step-by-step analysis outlines how each method works and the major advantages and disadvantages of each.

Outright purchase

Buying your own vehicles gives you complete control over your fleet, It's common among small fleets that don't want the administrative burden of a lease deal, and large fleets of 1000-plus vehicles that are cash-rich, You determine the replacement cycle, and how you dispose of them. You can also outsource some of the administration, such as fleet maintenance and accident management.

Brian Daley, finance director at the UK division of Groupe SEB, parent company for high-street brands such as Tefal and Krups, advocates its advantages: "About five or six years ago we ran a few cars on a leasing contract, but we found it very inflexible. The cost is determined by the length and mileage of the lease and ours was set at 80,000 miles or three years. No car does 80,000 miles in three years; so the cost went u p if cars were given back early or we had to swap the cars around, which was a very unpopular move.

"We now buy all our cars and run them on a four-year/100,000-mile cycle, Yes, there is the initial outlay to consider and I can see why some companies could not afford to do it, but we have sufficient resources to pay for cars upfront. We also enjoy favourable finance charges through our parent company and our rates are much lower than those offered by many leasing companies. The office manager takes care of the day-to-day administration: tax renewals, MOTs, lyre changes, services ... and I would say this takes up no more than a few hours each week. From my experience maintaining a lease is not completely painless either; it's almost more intensive as monthly payments have to be processed through the accounts. We operate BMW, Audi, VW, Saab and Jaguar because they have good whole-life costs and sell them either to the staff or to a local trader."

Outright purchase

Advantages

* Flexibility: cars are bought and sold as required

* Capital cost of vehicles can be offset against tax

* VAT savings if vehicles are used solely for business--eg. pool cars

* Cost-effective if managed skilfully

Disadvantages

* Requires high initial capital outlay

* Lessee has to take on: RV risk

* Small fleets lack bargaining power to get big discounts

* Maintenance costs can be uncertain

Contract hire

The popularity of this option is fuelled by one simple premise: minimum effort, maximum benefit, Among Lex Vehicle Leasing's customers--almost 99,000 at the last count--94% opted for contract hire in 2003.

The lessor calculates how much it would cost to run a vehicle over a fixed period. The figure generated will take into account depreciation and maintenance, plus a funding charge. Most leasing companies offer a suite of bolt-on packages and, at the end of the contract, the car goes back to the lessor with nothing more to pay.

Contract hire

Advantages

* Risk remains with the leasing company

* Transparent costs ease budgeting

* Vehicles are off balance sheet, so boost capital expenditure

* Reclaim 50% of VAT on the financial element of the contract

Disadvantages

* Excess mileage charges can be very steep

* Not suitable for fleets with unpredictable mileage patterns or high staff turnover

* Not ideal for perk cars (over 22k [pounds sterling]) as above 12,000 [pounds sterling] rentals costs cannot be offset against corporation tax

* No financial reward on sale

Finance Lease

Under finance lease, users are not necessarily tied to a fixed term, which makes this option more flexible than other schemes. Monthly rentals are usually higher as there's no predetermined vehicle life cycle and at the end the user arranges disposal and runs the risk of losing a heap of cash if the market crashes. The user can choose to pay back the entire capital cost plus an interest charge, or agree a final "balloon" payment to reduce the rentals.

Finance lease

Advantages

* Regular monthly payments aid cashflow

* Rentals can be offset against tax

* User can decide when to terminate contract (but still incurs some Charges)

* User can benefit if used market is on the up

Disadvantages

* Risk of resale value lies with user

* You do not own the vehicle at the end of the contract

* Higher rentals than with contract hire

* Appears as a debt on the balance sheet

Contract purchase

Small market share, typically around 5%. Most companies (and private buyers) opt for this route if they want to own the cars at the end of the lease and want no risk with the future resale value. Companies pay an initial deposit, then monthly payments over an agreed period, These payments are often lower than any HP deal because at the end you have three choices. First, you can agree to pay a final "balloon" payment to own the car outright; second, walk away with nothing to pay and the lessor buys back the vehicle at a pre-agreed value--often called the Minimum Guaranteed Future Value (MGFV); third, trade in the car for a replacement.

Contract purchase

Advantages

* Removes the risk of falling secondhand values

* Ownership is flexible

* Combines tax advantages of OP with the cashflow benefits of contract hire

* Regular fixed monthly rentals

Disadvantages

* VAT is not recoverable unless the vehicle/s is used solely for business use

* Not suitable tar fleets with unpredictable mileage patterns

* Unless the lessee pays the final balloon payment, ownership stays with the lessor

Hire purchase