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Feature: Outright purchase or lease? The best ways to fund vans

28 September 2016 #Features & Interviews #TNB News #Van

There’s more than one way to finance a van. Leasing and outright purchase are the most obvious options but there are subtleties within the former method in particular, that can make more sense depending on the type of business you’re running.

Ultimately, the type of funding should be dictated by how the vehicle is going to be used, as Mark Cartwright, head of vans at the Freight Transport Association, explains.

“If it’s a ‘doing’ vehicle, it’s a mobile toolbox, the driver gets out of the vehicle, digs a hole in the road, fixes your washing machine – the vehicle is technically a mobile shed. The ‘carrying’ vehicle is what it says – delivery – so it will start and finish the day empty dependant on what its particular trade is. In our estimation, [the van parc is] something like 70% ‘doing’ vans rather than ‘carrying’.”

If your vehciles are carriers and you are a large company, there’s a strong case for leasing according to Mark Jowsey, manufacturer liaison director at KeeResources.

“If you’re a major fleet acquiring vehicles for a permanent task, say if you’re a supermarket chain and you’re doing home delivery, that’s a good reason to take contract hire, [particularly] with an appropriate relief vehicle included.”

Businesses would also do well to consider leasing companies offering tailor-made vans for specific purposes. “If yours is a ‘doing’ van, you’re pretty unlikely to buy something off the shelf. There’s a fantastic opportunity for the more proficient finance providers to supply a vehicle that’s fit for use with the kind of racking and external equipment that suits the job,” says Cartwright.

“I know a few finance providers have had a bash at this. They’ve said ‘here’s a standard electrician’s van, here’s a standard plumber’s van, which is a great package – but it hasn’t particularly set the world on fire.

“I think they probably were a little bit ahead of the curve, and your average butcher, baker, candlestick maker hasn’t necessarily stumbled onto the fact that he could go through one of the lease providers and come away with something a lot better for his business at probably no real extra cost.”

Rental is always an option for the short term but it can quickly become more expensive than conventional leasing if the hire runs to anything more than a few months. It is appropriate for companies working fast-turn contracts, though.

“I know a major construction company that does a lot of specific contracts and in those circumstances, it’s easier to rent,” says Jowsey, “if they’re on a three to six-month project, they’ll take vehicles on rental, then at the end of the contract they don’t have to worry about being tied up, either in contracts or in capital expenditure.”

Being working vehicles, vans inevitably pick up damage and the severity of their wounds can dictate how best to fund them.

“Generally, if you’re going to knock them around, they’re going to have a hard life and do a lot of miles, you’re probably better off buying, because the penalties will be fairly significant on a lease,” adds Jowsey, “you’ve then got complete flexibility of how long you retain them for, how you reallocate them to balance mileage and if you find you’ve got surplus, you can dump them.”

However, certain types of leasing are more fitting than either rental or straight contract hire, particularly for heavily used vans, as Paul Coley, principal consultant at leasing firm Lex Autolease explains.

“If, for example, you’re a construction firm and your vans are constantly on site getting battered then contract hire is not a good product for that vehicle, purely on the basis that when it comes to the end of the contract, there’ll be damage, dents and you’re going to be charged x, y and z in end-of-contract charges.

“The best product if you’re in that that scenario is finance lease. There are no early termination charges, end of contract charges or excess mileage charges – you basically take a hit on whatever that vehicle is sold for.”

Finance lease is not necessarily more expensive than contract hire according to Coley, but it is a more flexible package. At the end of the contract, the leasing company sells the vehicle for the customer and the price is dictated by condition and residual value.

“With contract hire, you’re fixed; it is a 48-month, 80,000-mile contract. You can extend it or change it mid-term but you’re pretty restricted to term and mileage. With finance lease, you’re not restricted. So if you hire a van and you’ve only done 40,000 miles in four years, you could say ‘I’ve got economic life left in that van, it’s still in mint condition so I’ll have two or three more years on that lease’ and pay what is called a peppercorn rental – that’s a small element of rental per year to use the vehicle.

“If the vehicle comes back battered, you’ll feel it at the back end but it depends on the residual value and how it’s sold. It’s just a slicker product for that type of environment.”

Vans with the strongest residual values tend to be self-funded models from sole traders and SMEs, as their specification renders them more attractive to used buyers than typical ex-large fleet vehicles, which can be white noise in an auction hall according to James Davis, director of commercial vehicles at Manheim Remarketing.

“The large corporate fleet won’t want to over spec the vehicles, whereas you tend to find an increasing number of SMEs, certainly sole traders, will go to their local franchised dealer, find the metallic van, put alloy wheels and leather on it and seats in the back because it doubles up as a family car on the weekend.

“It creates much smaller volumes but it also creates a different product, almost car-like in its behaviour. Then if it’s on a PCP or a manufacturer lease, you’ve suddenly got some really unique stock, really nice age, lovely mileage, great spec – and the franchise dealers can’t get enough of it.”

Strong residual values and the popularity of car-like vans, particularly with small businesses, is likely to lead to a diversification in the types of finance products on offer according to the FTA’s Cartwright.

“One of the things I think we will see going forward something similar to what’s happening in the personal car market, where different funding options have actually made it significantly more attractive to go for a new vehicle – personal leases, flexi rental, that kind of thing.”