THE IDEA of buying company cars outright still appeals to some businesses – but comes at a cost, reports motor finance expert, Brian Rogerson.IN JULY 2009 the number of new cars bought by UK small businesses increased by 0.4%. The rise, although extremely modest, represented the first growth in the sector for 15 months.
The growth, however, was largely due to the national scrappage incentive scheme and the fact remains that the total UK new-car market is still down by 550,000 units over the past 12 months.
Reporting the increase, Paul Everitt, chief executive of the Society of Motor Manufacturers and Traders added a caveat. “The industry,” he said, “still faces a long road to recovery and we urge government to take action to sustain economic recovery through easing access to finance and credit.”
Everitt was warning that, despite the increase in car sales, the number of new and used cars bought on finance by small businesses dropped by 23% and 16% respectively in the 12 months to June 2009. This was because finance lenders are still restricted by the amount of funds they have available to lend. The result has been an upswing in the number of vehicles that small businesses have bought using cash – outright purchase.
In many ways buying their company cars outright by cash is a peculiarly British sentiment. Brits like to know that they actually own their cars and retain the freedom to do with them what they like, whenever they like. However, the facts show that it is not an economically-efficient sentiment – and invariably comes with a cost.
The cost of depreciation
Depreciation is the running cost that too many people forget. It hits newest cars hardest. A new L15,000 Vectra will have a residual value (ie trade value if you wanted to sell it) of under L9,000 after a year – over 40% of the new price wiped out in 12 months and 10,000 miles. During a recession residual values are especially volatile and can lead to hefty losses for the unwary small business operator.
At the same time most company directors are reluctant to take the time away from their core work to research the new-car market and negotiate the deals. Deals that will not achieve the same level of dealer or manufacturer discount as larger specialist buyers (such as car leasing companies). They are often equally reluctant to tie up their working capital in seriously-depreciating assets at a time when most banks are reducing their balance sheets and tightening up their clients’ credit lines. Vehicles included on the company’s balance sheet as a depreciating asset are likely to affect future financing needs.
Fleet Alliance comment on outright purchase of company cars
Martin Brown, managing director of Fleet Alliance says:
The lease or buy question is one that will always be debated in the business car world.
Having seen numerous examples where having carried out a full discounted cash exercise which points the client towards leasing company cars – they still maintain their traditional outright purchase avenue. People can be very set in their ways when it comes to the lease or buy question!
For some, outright purchase presents a flexible option in respect of disposal patterns (no termination charges) and also no mileage limitation, which would exist with contract hire.
It also means taking risk on disposal, tying up company funds (very topical in a recessionary period) and can be precarious from a budgetary perspective.
Give me peace of mind, fixed budgeted costs and off balance sheet contract hire – all day long!
Need more help on discussing outright purchase v contract hire? Fleet Alliance can be contacted on: 0845 601 8407. Alternatively, visit www.fleetalliance.co.uk
