Leasing and rental: House of fund

Date: Friday, October 6, 2023   |   Author: Jack Carfrae

The jumble of obstacles facing van operators means the usual go-to funding methods may not be right for the times. Jack Carfrae asks if you should lease, rent or buy.

Van operators, be honest with yourselves, when was the last time you thought about changing the way you pay for your vehicles? We have run enough stories to prove that many fleets have given this serious consideration and changed tack, but we would be willing to bet that many have stuck with the same thing and likely the same supplier for a long time. 

And we would not blame you if you had. Changing the way you procure your vehicles, how long you keep them for, who you get them from, and potentially the brand and the type of fuel it uses is a massive upheaval. If it ain’t broke, don’t fix it. 

Broken it may not be, but the cracks in the ‘same again’ method are starting to show. Unlike passenger cars, the supply of which has rallied since the start of the year, those in the market for new vans will not need reminding of how difficult it is to get hold of them. New registrations may have been up 20.7% as of August, but that was still well below pre-pandemic levels. 

Add to that the government’s 2030 cut-off for ICE-only vans and still nascent electric versions (again, far from abundant) and just ordering another batch of what you had last time for the same term is not so viable. 

One thing we keep hearing from reputable industry sources is that a lot of fleets are avoiding changing their vehicles altogether, hanging onto existing vans for as long as possible. 

AFP chair, Paul Hollick, tells What Van? why: “Pre-Covid, a lot of fleets tried to shorten the length of [leases], and rightly so, because everyone was worried about having too long a holding length to be able to switch to new technology quickly enough.

“I think the problem is a lot of the holding cost issues aren’t just around van availability; there’s also the fact that EVs are still in their infancy. The proverbial low-hanging fruit has potentially already been done. You are into the hard element of EV deployment now and operationally it’s killing us. ‘I can’t be perceived to be putting new diesel vans on the road, so I just run what I’ve got for longer’.

“[Fleets are] just waiting for a hydrogen alternative or the next generations of EVs… and a lot of them are in that kind of ‘can’t go back, can’t go forward’ process. A lot of the van fleets that are massively extending are like that.”

Initially viewed as a necessary evil, extensions are not necessarily a bad thing. The AFP is one of several fleet authorities to point out that operators are successfully running petrol and diesel LCVs for almost twice the industry-standard [of] five years, although a keen eye on maintenance is crucial to getting that right. 

“We are seeing companies running vehicles to seven, eight and nine years old, which we never saw before,” says Fleetcheck’s managing director, Peter Golding. “With everything that’s been thrown at businesses, they are looking at vehicles and saying, ‘actually this is still durable and it’s still reliable’. 

“If a vehicle is going past its normal replacement cycle, I would say it should be going in at least every year for inspection because there are wear and tear items – suspension, clutches, shock absorbers – that could easily be getting close to the end of their life. Obviously, the MOT will pick up things, but… it is very restrictive. You can’t
take the wheels off, for example, so you can’t really inspect the brakes. The only way you really know if a vehicle is safe is by asking someone to do a safety check on it.” 

Golding also points to an often-overlooked funding method for vans that could work to the advantage of profitable businesses, which may end up hanging onto theirs for relatively long periods. “The Annual Investment Allowance… really is something a lot of businesses are unaware of,” he explains.

“HMRC consider a commercial vehicle to be plant and machinery, which means you can have 100% write off in the first year up to an asset [value] of £1m, which can be powerful when you are looking at funding options. 

“If you lease hire that vehicle, you can’t use that allowance. Whereas if you lease purchase, you’ve got a massive benefit there of 100% of the asset written off against corporation tax. Obviously, if you are not making any money and you don’t pay any corporation tax, then that’s not as relevant. But if you are paying tax… [consider] purchasing these vehicles so that you have them on your balance sheet.”

He applies a caveat to electric vans as its specifically tricky to make a call on their residual values. Its uncertain if these could decrease in value as more advanced equivalents with longer ranges appear, so are probably not the kind of thing a fleet really wants on its balance sheet. 

“If you are looking at electric vehicles, I would still recommend to lease hire them rather than take the risk of actually buying outright because if there is then an advancement in battery technology and you’ve got a three-year agreement you can always upgrade it and get one with a better battery.”

We discussed the role of mid-term flexible leases in our August issue, in which leasing giant Arval championed them as a try-before-you-buy method for electric vans. Consultant Ben Edwards claimed the lack of a long-term commitment and ability to hand back the vehicles was much easier to swallow than jumping in at the deep end with a conventional five-year lease. 

The format is said to allow fleets and drivers to get familiar with plug-in LCVs ahead of a wider rollout, and Edwards said almost every Arval customer that had gone this route had kept hold of their electric vans or ordered more. 

Sogo Mobility has a similar ethos. Though managing director Karl Howkins is agnostic about fuel types, the company specialises in exactly those sorts of short-term flexible leases with maintenance bundled in. 

“The average age of the fleet is 442 days, that works out at about 14/15 months across cars and vans,” he explains. 

Howkins concedes that LCVs stay on the fleet for longer, at 547 days or around 18 months on average. “Vans tend to be longer because customers want to sign write them, they probably want to put a bit of racking in … so you can’t turn them any quicker than that.

“If you’re getting a van from us, you’re doing 4,000 miles a month, you’re going to run into maintenance. If I’m in a product and I’m paying £30 more than a traditional lease but I haven’t got to pay for my road fund licence or my maintenance, I’m probably thinking, ‘that’s alright; I haven’t got to worry about it’,” Howkins explains.

Daily rental has always traded on its flexibility and ‘there when you need it’ status. However, suppliers have been no less at the mercy of new LCV shortages than anyone else and anecdotally we have heard stories of some household name rental firms shopping for used vans at auction to boost their availability. Despite the typically higher cost, some fleets have chosen to stick with rental for longer periods because it aligns with their contracts. 

“There’s still a fair amount of van fleets out there – even decent-sized ones – who are renting their vans for one-and-a-half/two-and-a-half years [because of] operational efficiency,” Howkins adds. 

“They might have shorter-term contracts with city councils and places like that, so they need a more flexible solution. They’ve caught a bit of a cold, obviously, post-Covid, because monthly rental prices have gone up substantially on a 90-day rolling hire in comparison to a five-year lease.” 

The moving target that is running a fleet makes it extraordinarily difficult to pick a clear course, but if we can draw a conclusion from the industry experts, then this is it. Profitable companies that still require petrol or diesel vans with the means to buy them outright or via lease purchase should go that route. In that scenario, the Annual Investment Allowance makes it a no-brainer, and you can hang onto the vans for as long as you like. 

For electric LCVs, leave the risk to the leasing or rental company and consider a shorter-than-average term. They will almost certainly be pricier than a five-year contract hire, but mid-term flexible leases are worth a look because you can whet your EV appetite without any serious commitment while skirting responsibility for their residual values.


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