Contract hire is growing as the preferred method for small- and medium-sized operators to finance their light commercial vehicles. Steve Banner finds out why this is the case and looks at the alternatives.
Contract hire is more popular among light commercial vehicle operators now than it has ever been say van finance specialists.
“We're seeing another year of expansion so far as our LCV portfolio is concerned and we reckon that there's a lot more growth in contract hire yet to come,” says Grahame Neagus, head of the specialist commercial vehicle unit at Lloyds TSB Autolease.
“Small to medium-sized enterprises are expressing a lot more interest in what it has to offer than they did in the past,” he continues. “These days they have a much better understanding of what their funding options are and they're copying the acquisition methods that have already been successfully used by bigger companies.
“In particular they've come to realise that it makes more sense for them to invest their money in assets that are likely to appreciate rather than depreciating assets such as vehicles.”
“Contract hire with a full maintenance package is still the preferred acquisition method of most van fleet operators we speak to because they can enjoy fixed costs for the duration of the agreement while handing over the residual risk to a company like ours,” says Lex Vehicle Leasing sales director, John Taylor. “Typically operators are signing up to three year/100,000 mile deals.”
By no means all van users are switching to contract hire, however, and the swing in its favour isn't as marked as some people expected it would be a few years back. “At present expansion is probably best-measured in single-digit figures,” says Eddie Parker, LCV sales specialist at Masterlease.
Sometimes referred to as an operating lease, contract hire does have its drawbacks.
While it's true that monthly rates are usually fixed at the start of the agreement, making it easier for the lessee to budget ahead, and that they're invariably lower than HP repayments, what the lessee is getting is the use of a vehicle, not its ownership. When the agreement comes to an end, the van has to be returned to the lessor.
The monthly payments can be charged against your firm's taxable profits.
Terminating a contract hire agreement prematurely can be difficult and expensive. The lessor will either be looking for a cheque for the difference between the vehicle's written-down value and its market value — likely to be substantial if the deal is scrapped after just a few months — or will want a cheque for all the rental payments you'd be making if you'd decided to hang on to it until the end of the contract.
The penalty you face, however, may be mitigated if you want to swap your existing vehicles for larger, or smaller, ones because the nature of your business has changed and you intend to stick with the same leasing company. They may also be less painful if the company has a self-drive-hire fleet and the vans you're returning can be switched to it without too many problems.
Nevertheless, it makes sense to find out at the start just what the early termination penalties are, and avoid putting all your eggs in one basket.
If you've got, say, ten vans, then it's worth thinking about acquiring eight under a contract hire agreement and opting for long-term rental for the other two. If there's a downturn in business then you can send your rental vehicles back without facing any penalty and without having to cancel any longer-term contracts.
Returning a contract hire van can result in some nasty surprises even if you only do so once the agreement has run its course. You may find you're clobbered for the cost of repairing every minor scratch and stone chip, even if the van has spent the last three years flogging up and down the M6 and was thus unable to avoid such blemishes.
Again, it pays to find out what the acceptable return conditions are before signing up to a contract hire deal.
Reputable contract hire companies will show you a guide to what constitutes fair wear and tear. On perusing it you're likely to discover that while minor stone chips are acceptable after three years/100,000 miles, dented cab doors and broken mirrors certainly aren't and quite rightly will have to be paid for.
“Remember that if the rates you're offered look suspiciously cheap, then that means you're likely to be stung at the back end of the deal,” says Neagus. “If you're in doubt, then it may pay to ask to talk to two or three of the leasing company's existing customers to find out what their experience has been.” If no names are provided, then walk away quickly.
Contract hire has the advantage that you pay the VAT on the monthly rentals. With Hire Purchase, however, you have to pay all the VAT at the inception of the agreement. OK, you can claim it back, but that takes time and may place a strain on your cashflow.
Some finance houses will pay it for you and add a bit extra to your monthly repayment to cover the cost, but that does of course mean that you're paying more interest. At least you can claim tax relief on it.
Depending on who you deal with you may find that opting for a contract hire agreement — with or without maintenance — will allow you to tap into considerable engineering expertise. The company concerned should be able to help you decide which vehicle is the right one for your business and may even be able to assist in the design of suitable bodywork.
Earlier this year Lloyds TSB Autolease unveiled a Volkswagen Transporter Sportline van equipped with a load area storage system and roof racking made out of lightweight but nonetheless strong, corrosion-free and durable, carbon fibre. It was developed in conjunction with Chambers Vehicle Conversions.
The weight saving achieved when compared with the use of steel fixtures and fittings means that the van can carry more. It could also result in a reduction in fuel consumption.
Contract hire companies can use their considerable purchasing clout to negotiate attractive buying terms with commercial vehicle manufacturers. That should be reflected in lower rates for their clients; and when it comes to warranty disputes, a light commercial vehicle maker is going to take a lot more notice of a leasing business that buys several thousand vans a year than a sole trader who buys one every three years.
So far as maintenance is concerned that purchasing muscle also drives down parts and hourly labour rates, again to the van operator's benefit.
Opt for Hire Purchase and you will of course get to keep the van once all the payments have been made. As with contract hire, the monthly payments are usually fixed and predictable.
If cashflow considerations mean you need to keep your monthly payments low, then you can always look at contract purchase. A variation of HP, it allows you to keep your regular instalments manageable by making a balloon payment when the agreement draws to a close.
That of course presupposes that you've accumulated enough cash in your bank account to write a big enough cheque when the time comes. If you can't, then you can clear your debt by returning the van to the dealer who supplied you. Alternatively you may be able to extend the agreement.
As indicated earlier, rental has the advantage that you can hand the vehicle back to the hire company at a moment's notice. Some businesses welcome this flexibility so much that they will happily take a van on a long-term rental deal lasting 12 months or more.
Such a choice is particularly appealing given that rental rates are increasingly matching contract hire rates. Traditionally they were higher.
“Where rental is really gaining ground is against short- and medium-term leases of from six to 12 months,” says TLS Vehicle Rental managing director, Andrew Way. “This is the tipping point at which the lines between rental and leasing are starting to blur and the point at which rental is very price-competitive against leasing.”
Earlier this year TLS launched a web site that aims to explain the pros and cons of different vehicle funding methods.
Several contract hire and rental companies, including Salford Van Hire, have recently warned operators that when they're comparing contract hire and rental deals, they must ensure they compare like with like.
While a contract hire with maintenance deal may include a replacement van if the one you've got breaks down and collection and delivery if yours needs servicing, that may not be the case with a rental agreement. Such features can of course be included, but may not form part of the basic package.
If you acquire a van on finance, then ensure you take out 'gap' insurance. If your van is written off in a crash or pinched and never recovered then it bridges the gap between the pay-out made by the insurers and any outstanding finance debt.
Whether it's financed or not, make sure as well that your van's insurance policy includes Uninsured Loss Recovery (ULR) cover. If you're involved in a smash, you weren't to blame, and you need to rent a van while your own vehicle is being put back together, then ULR helps you to get back the cost and any other uninsured losses from whoever was responsible.
Nobody likes paying insurance premiums, so cut yours by up to 20 per cent by insuring your van for use by named drivers only and ensure that none of those drivers are younger than 25. Lock your van in a garage or in your yard at night and you should be able to reduce your premium by up to five per cent, and having a Thatcham-approved alarm installed may be rewarded by a five to 10 per cent cut.
Thatcham is shorthand for the Motor Insurance Repair Research Centre in Berkshire.
While comprehensive cover is advisable in most cases — and may be mandatory if your vehicle is on finance — ticking the third party, fire and theft box on the proposal form could make sense if your van is getting on in years. It could save you up to 15 per cent.
Light commercial vehicle insurance is increasingly being sold over the internet so there's plenty of scope for some comparative research.
As with almost any purchase the secret to a good finance or insurance deal is to shop around. Don't accept the first offer made and make sure you know exactly what you are after before starting to investigate.