Financing in a post-crunch world

Date: Thursday, November 29, 2012

Manufacturers and their dealers are arranging the funding for a far higher percentage of the vehicles they sell in the UK than they were five years ago before the recession struck. So says Adrian Millar, brand manager at VW Commercial Vehicle Finance.
“Back in 2007/8 about one in six or one in seven of the VW LCVs we sold were financed through us,” he says. “Now it’s more like one in three. After the onset of the recession the number of finance companies willing to fund vans declined significantly.” Many of those that remained tightened their lending criteria.
As a result it is not surprising that more operators  started to talk to their van centre – and the van centre was happy to talk to them. After all, if customers who require finance cannot obtain it, then they cannot acquire a manufacturer’s vehicles.
None of this is to suggest that the firm’s finance wing dramatically relaxed its lending criteria in order to win business, says Millar. “Our approach to credit scoring is the same as it was before the recession,” he says. “In fact, we’ve taken a decision to keep it that way, and we’re happy to fund chassis cab conversions, too, and are eager to do so. Unfortunately, of course not all businesses applying for funding can meet our requirements.”
One big change he has noticed is that a far higher percentage of van operators are opting to lease vehicles than was the case in 2007: “Back then, 70% of those we provided with funding favoured HP/lease purchase while the remainder went for contract hire or a finance lease; today it is almost precisely the other way round.”
A rising number of operators are starting to realise that what they need is the use of a van, not necessarily its ownership, he contends: “As a consequence, they are becoming happier to lease.”
If they can match the duration of, say, an operating lease to the duration of any contract they have won, then when the contract ends they can simply return the van to the lessor, who is responsible for disposal.
“Go for this type of package and you can fix your monthly payments and predict your cash flow more accurately,” Millar says. Servicing and maintenance can be included in the deal too.
“Rates are only likely to change if VAT or VED goes up,” says Dave Freeman, manager of the CV specialist division at leasing firm Alphabet. Definitely still interested in helping companies acquire vans, it has some 16,000 LCVs on its books: an indication, if one were needed, that manufacturer finance is by no means the only game in town.
Rival Hitachi has 30,000 on its books ranging from car-derived vans to 44-tonners. A sound reason for dealing with leasing companies, says UK head of CV sales, Mike MacDougall, is that it can objectively advise clients on which makes and models will best suit their operation; go to a manufacturer and you will probably end up with whatever it happens to be supplying at the time.
Companies such as Alphabet and Hitachi can negotiate hefty discounts with suppliers of everything from vans to load-area racking – it too can be covered under a finance agreement – because of the quantities of products they buy.
“We’ve seen quite a lot of downsizing of vans over the past few years,” MacDougall observes. It’s a trend that could continue. Operators are realising that running a smaller van can make more sense than operating a big one that is half empty most of the time, especially since the former is likely to burn less fuel and generate less CO2 than the latter.
Importantly for businesses wanting to keep a tight grip on outgoings, the monthly rate they pay if they opt for, say, an operating lease, is less than it would be for HP. The latter is pricier because it ultimately leads to ownership of an asset. Some businesses are wary of signing a lease, however, because they fear being penalised heavily if they need to terminate it prematurely. “Under those circumstances most lessors will require a percentage of the outstanding rentals to be paid, so you should always enter into such agreements with your eyes open,” says Millar.
“If you have good reason to suppose that you may have to send back some leased vehicles early then you can always take out insurance to protect yourself against any extra costs you may incur,” counters Freeman. “It may also be possible to build a clause into the contract that allows you to return a limited number of vans early on in, say, year three of a three-year agreement.”
Operators may also worry they will be penalised for every minor stone chip and scratch when an operating lease draws to a close and they return the van to the lessor, a fear Alphabet’s van expert is keen to quell. Reputable leasing companies will not send clients a big bill because a van has suffered a bit of fair wear and tear says Freeman. They recognise that a panel van on parcels work will not look factory-fresh after spending three years of making deliveries.
But there is a major distinction to be made between a few minor blemishes and, say, a missing front bumper and cigarette burns in the seat upholstery. Serious damage of that nature will have to be paid for.
“The British Vehicle Rental and Leasing Association produces a guide to what constitutes fair wear and tear on a van and those are the guidelines we adhere to,” Freeman says.
A wise lessor will encourage customers to look after the vans they acquire and assist them in an emergency. As part of its approach, Alphabet supplies all the vans it delivers with a safety pack that includes items such as a tyre pressure gauge, a high-visibility vest and a warning triangle.

Pooled mileage

Businesses concerned that a van may end up covering far more miles than was predicted at the inception of a lease may be comforted by the availability of pooled mileage arrangements – if a number of vehicles are being leased, then the excess mileage clocked up by some is cancelled out by the lower-than- expected mileage recorded by others. This may not always work, of course, if a lot more vans operated by a company have exceeded their mileage than have undershot it. Potential mileage issues should be picked up early on in an agreement rather than at the last moment, says MacDougall, either as a consequence of monthly or quarterly reviews conducted with the customer or by monitoring the mileage every time vehicles go in to be serviced.
The fondness of small businesses in particular for leasing should not be exaggerated contends Professor Colin Tourick, visiting professor at the Centre for Automotive Management at the University of Buckingham’s Business School: “They certainly want low payments, but typically they still want to own their vehicles, too, and have far fewer hang-ups about paying for them over three years
and then getting rid of them. They may, for example, pay for a van over three years but end up keeping it
for five. There is also the point that many small operators buy used rather than new.”
Finance packages for used vans are widely available, although some funders say they will not quote a contract hire rate on anything that is more than 12 months old.
As vans age they become less appealing candidates for an HP deal, too, so far as funders are concerned, but buyers may not need to resort to finance anyway. The older an LCV is, the more likely it is that the purchaser can afford to pay cash for it.

Worth the rate

Customers who choose HP with VW are typically paying interest rates starting at 3.9% says Millar – far higher than the Bank of England base rate, which was 0.5% at the time of writing, but low when one considers the high rates charged by funders a few years ago.
“Deposits range from 0% to 20% depending on the client, but average out at around 10%,” he observes. Remember that VAT-registered businesses that opt for HP will have to pay all the VAT levied upfront Millar adds, but should be able to claim it back reasonably quickly.
Many van makers periodically offer 0% finance deals along with packages that may, for example, include free servicing. Vauxhall is a prime example with its 4x4x4x4 offer (0% finance, free servicing and breakdown assistance for four years plus a four-year warranty).
Firms that believe they may need to return vans early can always opt for a long-term rental agreement rather than leasing or HP says Jonathan Pearce, marketing manager at rental giant Northgate. Operating through 62 branches in the UK and the Republic of Ireland, it has some 50,000 rental vehicles on its books.
“Rent a van from us and we’re still responsible for servicing and maintaining it and we’ll supply a replacement vehicle if the one you’ve got is off the road,” he says.
Rental has the advantage of allowing the hirer to return the van at a moment’s notice without facing a penalty. That is a big advantage to firms whose requirement for LCVs rises and falls because their business is seasonal or because they enjoy a sudden surge in sales.
“If you believe that 20% of the business you do might be at risk then it makes sense to rent the vans you use to service it rather than acquire them outright,” says MacDougall.
That flexibility comes at a price, but it is a myth that rental is always more expensive than contract hire Pearce contends.
“Major fleets may find that contract hire is cheaper, but that is not always the case where smaller operators are concerned,” he says.
Leases are available that run for as little as 12 months but not everybody is convinced of their virtues.
“If you’re looking at a period of say a year or a year and a half then rental makes more sense,” argues MacDougall. “Leasing is really only appropriate if you are talking about 24 months or more.”

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