Don’t buy cars!
There are other simpler and more cost effective ways to pay for your fleet, says Nigel Lewis.
It’s a common memory. Cars have been a major part of negotiators’ daily work for decades but the way company vehicles are financed is changing, as more efficient and low-cost ways of providing individual vehicles and fleets become more popular.
It’s a huge industry within an industry. At the top end, the largest estate agent group, Countrywide, spends millions of pounds a year running its fleet of 4,500 vehicles including the fuel, insurance, leasing and repairs costs. Others are more shy about running costs and for example, Savills only discloses the value of its fleet – £54 million.
Countrywide employs 10,500 staff and therefore has approximately one car for every two members of staff which, if you apply that to the whole industry, means there are probably 50,000 to 70,000 estate agent cars driving around the UK.
Also, on average ,agents spend £4,500 a year running, servicing and insuring each vehicle, based on figures from the Countrywide 2015 annual report, research by IbisWorld and data from the National Association of Estate Agents.
CASH OR LOAN PURCHASE
US industrialist John Paul Getty once said, “If it appreciates, buy it – if it depreciates, lease it.” And agents have been following his advice. While buying a vehicle with cash, bank loan or even a credit card is now less popular, for larger branch networks leasing is now the dominant choice.
“The trend over the last few years has been to move away from funding vehicles via a bank loan or hire purchase agreement and towards contract hire or lease purchase agreements,” says Steve Bolton of Barclays Asset Finance, who says that Barclays indirectly funds many estate agent fleets through contract hire companies.
LEASING
For mid-size agents with a dozen or more cars being used across five to ten branches, for example, buying their cars or fleet is not practical for two main reasons. The first is that cash flow is unlikely to support the direct costs of buying such a large number of cars, and the second is that few business managers or owners have the time to be directly managing the day-to-day tribulations of owning their own fleet – such as maintenance, repairs, insurance, MOTs and vehicle excise duty. Therefore, the most common answer is to lease, rather than own, vehicles. Such agreements come in several flavours.
CONTRACT HIRE
Contract hire is the most common form of leasing among estate agents because the payments are kept low, as are the up-front costs. It also enables agents to acquire much more up-market cars than they might be able to afford via buying direct.
How does contract hire work?
You go to a leasing company and discuss which type of car you want. Different leasing companies specialise in different car marques while the larger national leasing companies offer wide ranges of car brands.
The leasing company buys the car from the manufacturer and is the owner of it, which will be stated on the V5 document. It then leases the vehicle to your company for an agreed period of time and monthly cost. Variables include how much ‘initial rental’ you pay, the maximum annual mileage you commit to, and the length of the contract you sign up to.
Initial payments vary but the standard is three months’ worth; however, some leasing companies offer £99 initial payments, and others offer options of up to nine months. The more you pay up front, the lower the monthly payment for the car.
Mileage also dictates the level of your monthly payments – the more mileage allowed, the higher it will be. The minimum is usually 8,000 miles and the maximum 40,000 miles.
Most agents who lease or contract hire their vehicles also sign up for ‘total vehicle management’ packages which mean they have very little to do with the vehicle on a day-to-day basis except filling it with petrol. These packages often include the maintenance, servicing, tyres, MOTs (for cars over three years old) and repairs for each vehicle. Some agents opt to do this themselves or contract it out to a third party – and one famous example of an agent taking this approach is Foxtons.
But remember leasing or contract hire does not include vehicle insurance, which you’ll have to source separately.
What are the advantages of contract hire?
- Monthly payments are usually much cheaper than simply renting a car.
- VAT on payments can be claimed back.
- Low payments help cash flow.
What are the disadvantages?
- You never own the vehicle.
- It can get messy if you crash the vehicle or want to end the contract early. “
Contract hire is ideal for agents who want to have the running of their vehicles or fleet outsourced because it’s much easier to have these ‘ancillary services’ such as accident management facilities bolted on to the contract hire agreement,” says Steve Bolton of Barclays Asset Finance.
Go direct
The BMW & MINI Business Partnership is a specialist division of BMW, offering businesses comprehensive rental (contract hire) packages on both BMW and MINI models.
As an example, they are currently offering a MINI Cooper Clubman for £175 a month, plus an initial six months’ rental of £1050. It’s a two-year deal giving an annual 8,000 mileage allowance. For £10 a month more, you can have maintenance (servicing) as part of the package, which also includes tyre replacement and breakdown cover. It doesn’t leave you much to worry about! www.bmwbusinesspartnership.co.uk
LEASE PURCHASE
This is a method of buying a vehicle that is a mix of leasing and hire purchase.
The leasing company works out the likely value of the car at the end of the leasing agreement (known as residual value) and you pay a monthly contract hire based on the different between the retail value and the residual value.
You then commit to paying the residual value of the vehicle at the end as a lump sum – it’s not an option, it’s a way of keeping the monthly payments to buy a vehicle low by pushing some of the car’s value into the ‘future’.
This is often also called a ‘balloon payment.’ “All that does is reduce the monthly outlay which for small and medium size estate agents will be an important benefit for them,” says Steve Bolton.
“In my experience most agents who use financing of some sort will be using a leasing arrangement that uses balloon payments to keep their costs down.”
What are the advantages of lease purchase?
- It’s a way of financing the purchase of a vehicle but keeping the monthly payment low.
- It’s a popular way to buy luxury cars – which keep their value better and therefore, the residual value is higher (and the monthly payments lower).
- The vehicle is kept as an asset on the company balance sheet.
What are the disadvantages of lease purchase?
- You have to pay for the maintenance, servicing and repairs of a vehicle
- The balloon payment will need to set aside for the end of the lease purchase agreement, which can be a drain on that year’s cash flow.
- You can only claim the VAT back on the vehicle if it’s used only for business – which isn’t common among estate agents.
HIRE PURCHASE
Hire purchase is a mix of leasing and loan which enables your business, at the end of the agreed hire period, to own the vehicle.
How does it work?
You are not ‘renting’ the car as you are with a contract hire agreement. Instead, over an agreed period of time – usually approximately five years – your business pays for the car in monthly instalments after you’ve put down a deposit, which is usually 10 per cent of the purchase price. Most hire purchase agreements are provided by a lender (such as a bank or broker) but arranged by a car dealer.
What are the advantages of hire purchase?
- Your business owns the vehicle at the end of the agreement.
- You can claim the interest charged as part of the agreement against tax.
What are the disadvantages of hire purchase?
- If you fail to make all the payments, then the lender may repossess it.
- The interest rates charged by the lenders can be high.
- You can’t sell the vehicle during the hire purchase period.
