23 November 2020

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Increasingly businesses are running vehicles with different types of powertrain, which means you may need different funding methods as operating profiles diverge too. Here are some issues to look at.

The fleet landscape is changing faster than ever. The days of being able to simply choose diesel vehicles for all employees and all roles is over due to their higher costs and taxes, and the rise of electric powertrains.

Added to which is the shift in working practices that have been seen over the past year, which may change the distances employees drive in future as well. Consequently, the ‘one size fits all’ funding solution for all vehicles may be a thing of the past as well.

For example, the most popular funding model has always been contract hire, over three or four years, because it allows businesses to run vehicles with no residual value risk and at high mileage too, while being able to package up other benefits such as accident management and maintenance as part of the monthly cost. Around 850,000 cars were funded through business contract hire at the end of 2019, according to the BVRLA.

It was also relatively simple to operate when a business did not have access to large volumes of fleet data, or the ability to manage and use that data, even if they did.

But in future, it seems likely that a business’s fleet may comprise many types of vehicle, and different usage profiles, from the traditional high mileage diesel commercial vehicle or job need car, to more tax-efficient petrol cars for those doing less miles, and electric vans and cars for specific operational roles, low mileage perk drivers, or environmental considerations. 

As technology increasingly helps the fleet operator to more easily understand its vehicle’s usage, and also offer employees options when it comes to choosing vehicles, it might be that different types of funding might suit different driver and operational profiles better.

The changing fleet

Already the British Vehicle Rental and Leasing Association (BVRLA) is seeing a shift in the leased fleet its members collectively operate. According to BVRLA figures, the overall leased fleet of its members had shrunken by 3.6% year-on-year, with the impact of the pandemic the major cause of this - although a 2.1% growth in the LCV fleet size partially offset the 5.2% drop in the total car fleet.

What has been noticeable is the rise in the number of battery electric vehicles (BEV) on the BVRLA members’ fleets, up 1.8% year-on-year, with new BEV registrations were up 5.5% compared to the same period last year. 

By Q2 2020, BVRLA fleet new car registrations showed 46% petrol, 34%b diesel, 14% hybrid and 6% pure electric: a wider spread across all powertrain types than ever before.

Added to which, businesses also need to think about employees who might want to opt out altogether and take cash instead of a car, or whether it is time to set up salary sacrifice schemes to take advantage of low BIK tax on electric and some plug-in hybrid vehicles.

Methods of funding 

So what are the methods of funding available? There are a number of basic funding structures, as listed below, but within these are numerous variations based on the financial circumstances of a particular business. 

Only by speaking to leasing companies, and using their often extensive and exhaustive consultative divisions, will you be able to drill down to exactly what you need for each of the roles, vehicles and employees in your business. Then you can make informed decisions about the blend of funding you need as the fleet develops over the next few years.

Find out if you will get a dedicated account manager, and consultative division you can access, to ensure a clear line of communication, and set out service level agreements and key performance indicators and find out how they intend to meet, and measure the standards expected.

Also, discover what level of IT capability the funding providers have and how their systems will interact with yours. The key to successfully introducing blended funding is to be able to access all the information you need quickly and easily for all methods.

Outright purchase

You could of course just buy your vehicles outright yourself if you have the capital. Should you choose to take this route, wholelife cost analysis is the only accurate way of assessing the financial impact of running them.

This is a combination of costs added together throughout a vehicle’s working life, with some of the main ones being fuel, depreciation and servicing, maintenance and repair.

Crucially, you will have to take the residual value risk on the vehicles yourself, and in a market such as electric, where vehicles are developing all the time, it may be hard to predict worth in three or four years’ time.

Contract hire

Contract hire works by paying initial rental up front, followed by equal monthly payments for the remainder of the contract term. At the end of the contract, the vehicle is simply handed back.

If it is in acceptable condition, and within the agreed mileage parameters, then you have nothing further to pay. If this is not the case, then there will be further charges.

For businesses who know exactly what they want from a vehicle, and what its operational life is likely to look like, contract hire works well. You never own the vehicle, so you never have any risk in terms of residual values. 

What that does mean is the monthly rate you pay depends on the leasing company’s calculation of risk. If they take a conservative position of the future value of a particular vehicle – unsure about electric perhaps, or whether diesel will be popular on the used market in five years - you may pay more a month. That said, it can also work the other way so you pay less if they are confident. So be aware of their position on various powertrains.

It’s worth remembering too that if you contract hire your business cars, then those rentals are an allowable expense against income tax or the firm’s corporation tax. However, certain lease rental restrictions apply, depending on the car’s CO2 emissions.

Salary Sacrifice

With salary sacrifice, cars are made available to an employee in return for a reduction in salary. The amount is taken before they are paid, and the employee saves income tax and National Insurance on the amount sacrificed, and takes advantage of the low benefit-in-kind rates for EVs instead. At the same time, the employer saves on National Insurance and pension contributions too.

Typically, the type of employees involved in salary sacrifice were those not in company car schemes, but with the change in rules so that only cars of 75g/km or less qualify for salary sacrifice (effectively only battery electric vehicles and some plug-in hybrids), it is becoming a more popular funding option again.

For more information on salary sacrifice, see our guide ‘What you need to know about Salary Sacrifice’.

Finance lease

In finance lease, an initial rental is paid, followed by monthly payments for the remainder of the contract term. At the end of the term the vehicle is sold, with the proceeds used to settle the remaining value. If the price is higher than the balloon payment, you may have an agreement with the funder to share the ‘profit’.

This balloon payment can be set to suit your cash flow requirements. If no balloon payment is set (making this what is called a fully amortised finance lease) there is the opportunity to retain the vehicle at the end of the contract for a small ‘peppercorn’ rent.

However, with flexibility comes residual value risk. Those using finance lease need to work closely with their supplier to ascertain the best time to defleet specific vehicles for maximum return.

Finance lease can be useful for those companies whose vehicle journey patterns and distances can be hard to predict, because there is flexibility around end-of-contract mileage. 

So it might be a useful finding method for a high mileage delivery van fleet or conversely, electric car in which a business is not sure what use they will get until they have been on the road for some time.

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