In the features below we consider whether you should buy a truck outright if you can afford it - or whether the off-balance sheet benefits of leasing outweigh the reasons to own a truck outright.
Outright Purchase Of Trucks Instead Of Finance
While some commercial vehicles hold their value better than others, they all have one thing in common. They end up being worth progressively less as the years tick by; so if you buy one for cash, you are putting your hard-earned money into a depreciating asset.
Got the Cash?
What is more, you have lost the use of that money, and you may regret it if you run into a cashflow problem. Remember it is cashflow - or the lack thereof - that is the main killer of businesses.
Bear in mind too that if you are an O-licence holder then the Traffic Commissioner has to be satisfied that you have sufficient funds available to keep your trucks in a fit and serviceable condition.
There are other ways of satisfying that requirement than having cash in the bank; showing that you have an agreed overdraft facility that you are not using for example.
But overdraft facilities can be pulled at short notice, as all too many firms discovered to their cost during the recession. With cash, there is no argument.
Of course if you are lucky enough to be sitting on a mountain of money you do not know what to do with, have invested all you need to in productive plant and machinery and still have so much left over that you can buy vehicles without compromising your cashflow, then purchasing vans and trucks can make sense.
Low Interest Rates = Low Deposits
Historically-low interest rates mean that your money will not earn anywhere near as much on deposit as it might have done ten years ago and buying vehicles outright has one big advantage over all the other funding options; you can sell them and release some cash if times get tough again and you lose a contract or two.
Alternatively, you can sell them to a finance company, get your hands on some capital and lease them back, although by doing so you will of course lose their ownership and the leasing payments you will have to make will mean your overheads rise.
Truck Contract Hire Information
If you decide you do not want to buy your vehicles then you can always pursue the contract hire route.
Sometimes referred to as an operating lease, contract hire gives you the use of your vans and trucks, but not their ownership.
How Truck Contract Hire Works
The monthly rate you pay is calculated with reference to their projected residual value, their predicted mileage, the duration of the leasing agreement, the type of work you are on and prevailing interest rates. Several monthly lease payments may have to be made in advance at the start of the agreement, in effect acting as a deposit.
The rate can include the cost of ancillary equipment such as tail-lifts. If you sign a contract hire with maintenance deal then servicing will be included too.
It is however vitally important that you know exactly what the maintenance element of the deal encompasses. While it may include oil changes and statutory inspections - where applicable - it may not for example include replacement tyres.
Contract Hire and Accounting Benefits
A big advantage of rolling up your contract hire and servicing costs into a single fixed monthly payment is predictability. You know what a significant chunk of your overheads is going to amount to for the next three to five years.
That makes forward planning a whole lot easier. Such predictability also makes it easier to tender for work because you can be more certain of your base costs.
Contract hire is off-balance-sheet finance. In other words, the vehicles do not need to be shown as assets in your accounts.
The leasing agreement will however have to be highlighted in a note to your accounts as an ongoing liability.
Regular payments under a contract hire agreement can be offset against corporation tax and the VAT element can be reclaimed by VAT-registered businesses. The lessee cannot claim capital allowances, but the lessor can, which should hopefully help keep the rate the former pays at a manageable level.
"Your lease can be extended if you have ordered a new vehicle and are having to wait for it or if a contract you have with one of your own customers has been extended for another year or two," says Tony Grove, Light Commercial Vehicle Manager at contract hire and fleet management specialist Arval, part of the BNP Paribas Group.
Don't Gamble on a Truck's Future Residual values
The lessor is responsible for disposing of the vehicle at the end of the agreement, and takes the residual value risk.
If it is worth more than he predicted, then he takes the profit. If it is worth less, then he takes the hit.
Either way, it is not the lessee's concern.
Deal with a company like Arval, says Grove, and you benefit from its buying clout.
"We buy 6,000 to 7,000 vans annually and the purchasing advantage we have carries over to maintenance as well," he observes. "The contract hire maintenance cost will be based on rates negotiated for a fleet of around 26,000 light commercials."
A wide variety of vehicles can be obtained under contract hire agreements.
Burnt Tree, for example, has started offering refrigerated trucks and lists DIBS Distribution as one of its early clients.
Mercedes-Benz has recently supplied 36 Arocs 3236 four-axle concrete mixers to Hope Construction Materials which are being acquired on contract hire.
Avoiding Truck Contract Hire Penalty Charges
Does the truck have to be perfect?
Businesses often fear that they will be financially penalised for every minor scratch and blemish when the van or truck is returned to the lessor at the end of the agreement. Responsible leasing companies will not adopt such a stance, however, will recognise that commercial vehicles are bound to incur a certain amount of wear and tear in service and will adhere to the British Vehicle Rental and Leasing Association's guidelines covering this area.
Although minor dings should not be charged for, more serious damage such as a broken windscreen or a badly-dented cab door most certainly will be. As a consequence it makes sense for the lessee to subject the vehicle to a pre-inspection a month or two before it is returned to the leasing company and ensure that such damage is fixed.
The golden rule is to find out about the return conditions before you ink any agreement; not afterwards.
Penalties that may be levied if a contract hire agreement has to be terminated early represent another cause for concern.
Examples of penalties to watch for
The lessor may, for example, insist on a payment that covers the difference between the vehicle's written-down value and its true market value. The payment required may be a substantial one if the deal is being scrapped only a few months after it was entered into.
Alternatively, and depending on the agreement you have signed - check the small print first - the lessor may require a percentage of the rentals that would have accrued had the agreement run its full course to be paid.
Much will depend on individual circumstances however.
The penalty may, for example, be rather less onerous if you wish to, say, swap some car-derived vans you are leasing for some 3.5-tonners instead because of a change in a contract you have with a client, and want to lease them from your existing lessor. The size of any penalty may also be reduced if the leasing company can easily place the vans you wish to offload with another customer, or transfer them to a self-drive-hire fleet it may happen to own.
It may also be possible to build a clause into the contract that allows you to return a limited number of vehicles early on in, say, year three of a four-year agreement.
Mileage Concerns on Truck Contract Hire
Cover more miles than you initially predicted and you will be hit by a pence-per-mile penalty for the excess once the lease deal expires.
To avoid this you can ask for the agreement to be re-structured after, say, the first year to take into account the fact than your vehicle is covering a lot more ground than you expected. You will pay more per month, but at least this means the burden will be spread and you will be shielded from any nasty surprises two or three years later.
If you lease a number of commercial vehicles from the same supplier then it may be possible to take advantage of a pooled mileage arrangement under which the excess miles clocked up by some are cancelled out by the lower-than-expected mileage recorded by others.
Potential mileage issues, along with other issues such as damage, should of course be picked up during monthly or quarterly reviews conducted jointly with the lessor and by monitoring the mileage every time each vehicle goes in for a service.
Truck Lease Purchase Explained
Outright acquisition need not mean parting with a lump sum from your bank account. It may instead involve using lease purchase, which is not dissimilar to HP.
Lease purchase gives you outright ownership of the asset (and responsibility for its ultimate disposal) once all the payments have been made. The deal can be structured so that the final payment is a large so-called balloon payment in order to keep monthly outgoings down.
Because you end up owning the vehicle the total amount you pay is going to be higher than it would be under a leasing deal, although you can take advantages of capital allowances. It is also worth noting that you will have to pay all the VAT levied on the vehicle upfront.
Watch the VAT on your cashflow
VAT-registered businesses can of course recover the sum concerned, but they will not receive payment immediately, potentially placing a strain on their cash flow.
It may sometimes be possible to take advantage of a VAT-deferral scheme under which the finance house will pay the VAT on your behalf then claw back its expenditure by adding so much to your monthly payments. However such schemes are usually only available to businesses with a healthy financial track record, and making use of them will of course cost you more.
Opt for lease purchase and you will be paying interest on the funds advanced. Zero-interest schemes are available but they usually require the customer to put down a deposit that is likely to be more substantial than the deposit that is ordinarily required.
Long-Term Truck Rental
If maximum flexibility is your key concern then you can always opt for the sort of long-term rental agreement offered by commercial vehicle self-drive-hire specialists such as Northgate.
The vehicle can be returned at short notice and without any significant penalty. The hire company is responsible for maintaining it and will replace it if the one you have got is off the road for some reason.
Flexibility comes at a price, but the price is not always significantly more than you would pay if you opted for a contract hire deal instead.
Perhaps the ultimate answer for many operators is to opt for a mixture of solutions, acquiring some vehicles outright by using cash or lease purchase, obtaining others on contract hire and renting the rest. If there is a downturn in business then you have the option of returning the rented vehicles first, selling the ones you own if things get worse and retaining the contract hire vehicles as your core fleet without having to pay a penalty.
Then all you have got to do is wait until things improve.