FINANCE leasing is looking ever more attractive for small businesses.
Why? Because experts are predicting that the residual values of used cars will continue to stabilise during 2009.
What this means is that firms owning company cars will face less risk.
And where the residual value of company cars is not a prime concern for a small business – then finance leasing comes into its own.
Under finance leasing (unlike contract hire) the lessee (the person who leases the car) shares in the profit or loss when the company car is sold at the end of the agreement.
One car leasing broker explained to me: “Vehicles are leased for an agreed period, after which the company (the lessee) can sell them, keep them on the fleet and pay a reduced rental or hand them back to the leasing firm. In this way finance lease gives more control than contract hire.”
He added: “Basically, the legal ownership lies with the lessor, but economic ownership – and risk – lies with the fleet. It allows the small business car manager to decide the best time for disposal.”
The different types of finance lease
There are two main types of finance lease: Fixed Period and Full Payout finance leases.
Fixed Period finance leasing enables monthly rentals to be reduced over a fixed period by agreeing a large final payment, which is a percentage of the anticipated value of the vehicle. This final payment will be paid at the end of the agreement, normally out of the proceeds of selling the vehicle.
With a Full Payout lease there is no final payment. However, companies have two options at the end of the agreement. Firstly, they can sell the car as the lessor’s agent to a third party and up to 95% of the VAT-exclusive sale proceeds are rebated to the company. Alternatively, companies may continue to use the car and enter into a secondary rental period. This secondary rental is calculated at around 1% of the original car cash price plus VAT per annum.
These secondary rentals are often referred to as ‘peppercorn’ rentals.
The impact of used values
But any risk in finance leasing is minimised when residual values are stable – as they are right now. Adrian Rushmore, managing editor at Glass’s Guide, confirms that continued shortages in the supply of used cars are bringing a much-needed boost to residual values.
He predicts that by the end of 2009 the value of the typical used car will end the year some 16% higher than December 2008. “An average three-year-old car,” he explains, “will be worth L5,100 in December this year. That’s some L700 more than a similar car would have changed hands for at the end of 2008.”
Auction company BCA’s latest industry report for May confirms that average car values have now risen for seven consecutive months. A spokesman said: “In May, average auction values increased to L5,773, a rise of L132 over the figure of L5,641 recorded in April. Year-on-year values are L311 ahead.”
All of which is good news for small UK companies. Especially those who are looking to renew their company cars but wish to preserve their capital.
Fleet Alliance comment on finance lease
Martin Brown, managing director of Fleet Alliance says:
There has been an increased enquiry level for finance lease over the last 18 months, particularly for commercial vehicles.
Some commercial vehicle users see the potential end of contract damage charges on contract hire as being risky, and therefore opt to take responsibility for vehicle disposal. Finance lease is perfect in this scenario, or indeed they can also fully amortise the cost.
Finance lease is an excellent product to convert some SME users from an outright purchase acquisition model – leaving them some of the risk and reward aspect in respect of disposal and maintenance.
Overall finance lease is an excellent product. In my view should be achieving greater penetration.
