November 2008 - SALE AND RENTBACK - A SOLUTION TO BEAT THE RECESSION
Businesses can often fail, not through lack of profits, but because of an absence of reserves.
Cost control and cash flow management are the main issues facing all businesses as they battle to counteract the impact of global economic turmoil, credit liquidity issues and a downturn in consumer spending.
Therefore, as corporates put every aspect of expenditure under the spotlight now is the time for all companies to undertake a root and branch review of their fleet funding strategies.
It is against that background that a shorter-term approach for long-term business health is called for, which has led to an increasing number of organisations focusing on vehicle 'usership' and not 'ownership' by turning to the flexibility of vehicle rental.
Traditionally, rental is viewed as an option to fulfil a temporary vehicle shortage, but the development of a range of products such as longer-term rental - often for many months - with no contract charges or early termination penalties combined with Northgate Vehicle Hire's launch of sale and rentback has broadened its appeal to a wider range of customers.
Building strong cost control measures into fleet policies requires sound knowledge of taxation and financial analysis, but it also requires directors to think outside the traditional box labelled 'fleet funding'.
Outright purchase and various forms of leasing are invariably viewed by financial advisers as the main funding options, but all carry elements of risk at a time when the cost of borrowing is increasing and banks have tightened their lending criteria putting pressure on a businesses' ability to raise new capital.
Most fleets that outright purchase their vehicles will have to borrow funds and the cost of money is rising. Meanwhile, the cost of borrowing money for leasing companies is also rising and that is being reflected in increasing monthly hire rates. Simultaneously, vehicle residual values have declined with some van models falling by up to 30% over the past 12 months, further impacting on the financial health of a business with over valued assets.
Under sale and rentback, companies benefit from an immediate cash injection into their business if they outright purchase, which is the most common funding method in the commercial vehicle market. Northgate buys all or part of the fleet from the customer and then rents the vehicles back - immediately replacing any old vehicles with new. This removes expensive depreciating assets from a company's balance sheet and gives the business a more modern and cost-effective fleet.
This approach can improve a company's gearing ratio - the ratio of debt to equity - and enhance the bottom line, but it is also a more tax-efficient approach, including being able to recover VAT; particularly attractive for fleets operating LCVs where they can maximise its reclaim to create a more competitive offering for customers.
With the money previously tied up in vehicles unlocked and returned to the business, it can be used to fund development of core activities. The fleet is now effectively contracted to Northgate for just 10 months before reverting to a completely flexible solution thereafter, making it an ideal strategy for companies that need vehicles without any risks or long-term commitment.
Not only that, but the residual value risk is now passed from the customer to Northgate, which also takes responsibility for and foots the bill for keeping the fleet serviced and maintained, in one fully inclusive monthly fee.
Simultaneously, businesses are increasingly focussing on reducing their transport carbon footprint and improving their occupational road risk management - both of which are taken care of as Northgate customers operate among the most modern vehicles on the road.
Northgate Vehicle Hire managing director Phil Moorhouse said: "We view 'sale and rentback' as the smart move for forward-thinking businesses. Organisations should view rental as a flexible method of vehicle acquisition rather than being burdened with the fixed cost that ownership or leasing entails."
Panel story
Firms turn to rental to meet cash flow needs
The economic downturn is stimulating demand for commercial vehicle rental with many companies in a survey of almost 500 businesses hit by the onset of recession saying they intend to hire rather than buy or lease vehicles in the future.
That was among the key findings of a survey into how businesses intend to cope with the economic turmoil by Northgate, Britain's largest vehicle hire company, which operates a fleet of 68,500 vehicles from more than 80 rental locations.
Almost a third of the 483 companies questioned reported a slump in business as a result of the economic slowdown, with many of those intending to increase their use of contract-free rental because they still required vehicles to meet customer demand.
Northgate Vehicle Hire managing director Phil Moorhouse explained: "This is where vehicle rental as opposed to leasing or outright purchase comes into its own. Firms can budget more effectively and have the flexibility to increase or reduce the number of vehicles operated at anytime without financial penalty."
Some companies view extending fleet replacement cycles as an option amid economic slowdown, but warned Mr Moorhouse: "Companies that take this route inevitably find that vehicles become more expensive to operate as running costs rise and residual values fall. Additionally, businesses running ageing vehicles will not be benefiting from the latest fuel efficient and safety features offered by today's newer models."
