September 2009 - Fleet World Article on Sale & Rentback
By Phil Moorhouse, managing director, Northgate Vehicle Hire
Fleet is often the third biggest cost to companies after property and salaries, so managing these costs is therefore critical - and never more so than when the economy is under pressure.
As corporates continue to tighten their financial belts amid economists' speculation that UK recovery to pre-recession levels may take several years and the future direction of residual values continues to remain uncertain, a root and branch fleet funding review is essential.
Best practice suggests that costs should be reviewed annually. However, the credit crunch recessionary storm that has engulfed the UK economy since mid-2008 would suggest that more regular reviews are conducted amid significant variance in the cost of borrowing money and business trading conditions.
Business flexibility is crucial and never more so than when companies are in the grip of recession and every penny counts.
Building strong cost control measures into fleet policies requires sound knowledge of taxation and financial analysis, but it also requires decision-makers to think outside the traditional box labelled 'fleet funding'.
Outright purchase and various forms of leasing - contract hire, contract purchase, finance lease, hire purchase etc - are invariably viewed as the main funding options, but all carry elements of risk at a time when the cost of borrowing shows little sign of decreasing as banks continue to insulate themselves against further losses.
Most fleets that outright purchase their vehicles will have to borrow funds - almost certainly at a much higher rate - and even then the banks might decide not to lend due to more stringent credit polices. Meanwhile, the cost of borrowing money for leasing companies has also increased and rising monthly hire rates reflect that.
Such an atmosphere does not inspire confidence and should therefore prompt a financial health check among all businesses.
Extending fleet replacement cycles has been a well publicised trend - largely by leasing companies - as a mechanism to help businesses overcome funding issues in the recession. However, while this might be convenient for leasing providers, end-user fleets leave themselves open to rising servicing, maintenance and repair bills.
But a potential cure for financial ills is often overlooked as companies gloss over the amount of business cash and management effort, tied up in their fleet vehicles.
For outright purchase fleets, a company's money is tied up in a depreciating asset that is worth less with every mile driven and swallows up more funds if unexpected repairs are required. Meanwhile, time and attention has to be invested in vehicle procurement and disposal where poor decisions can lead to heavy losses.
Sale and leaseback has been a staple offering of most contract hire and leasing companies for many years and overcomes such issues. However, outright purchase fleets that consider it as a funding alternative remain locked into contracts for typically three or four years.
Despite evidence that some 'green shoots' are emerging among the economic chaos, it makes little financial sense for businesses to sign such deals when, in many cases, huge uncertainty exists as to their future trading conditions.
Additionally, while businesses completing a sale and leaseback may have secured a financial injection from the sale and pass on the residual value risk to their chosen provider, there remains a financial sting in the tail if vehicles are handed back early as a consequence of downsizing in the face of trading uncertainty.
So, moving from outright purchase to leasing may alter the funding mechanism but there are inherent risks in both options that in a recession-hit economy are likely to prove far from appetising for most financial directors.
Instead, a shorter-term approach for long-term business health is called for, which has led to some organisations focusing on vehicle 'usership' and not ownership and turning to vehicle rental.
Rental has historically been viewed as a stop-gap transport solution, but the recession has changed and continues to change that perception
That is why sale and rentback is being viewed by some companies as the 'new' fleet funding alternative.
Expensive depreciating assets are removed from a company's balance sheet with the business receiving a capital injection.
The fleet is now effectively on short-term hire, so it can be expanded or reduced without notice and with no financial penalty, no long-term commitment and no 'hidden' extra costs.
All companies should do the sums and consider the trading conditions facing their market sector over the next couple of years.
Long-term planning is difficult at the best of times, but amid unprecedented economic uncertainty making long-term vehicle financial commitments could prove corporate suicide.
