Full maintenance contract hire is the risk-free fleet funding solution particularly in today’s uncertain business and economic times.
That’s the view of UK vehicle contract hire and leasing industry veteran Ian Hill, managing director of Activa Contracts, who argues that amid continuing business and political uncertainty organisations should seek to eliminate risk as far as possible.
Mr Hill, who has worked in the automotive and vehicle leasing industry for more than 50 years, believes that recent industry suggestions that funding vehicles on finance lease, perhaps with a bolt-on ‘actual cost’ fleet management package, was far from the risk-free solution that its backers portrayed.
Contract hire is the number one fleet funding solution in the UK, but finance lease, which unlike the former notably sees lessees take on the residual value risk, remained only popular with a small number of fleets in the UK.
While Activa Contracts, which operates a fleet of more than 7,000 company car and vans, offers a suite of funding solutions it presently has no customers that have opted to utilise finance lease.
As Brexit uncertainty continues with the UK’s future relationship with the European Union still unknown and the possibility of a general election looming, both of which are fuelling widespread business and economic uncertainty, Mr Hill said: “Contract hire provides certainty for fleets in uncertain times.
“Our customers want certainty and company boards want to know how much it costs to run their vehicle fleet all-in on a monthly basis. Contract hire inclusive of maintenance and other services, if desired, delivers that certainty.
“Fleet is non-core for most organisations. Just as businesses outsource other non-core activities such as office cleaning and security so they do fleet provision because they want costs to be predictable. Vehicle residual values along with maintenance costs are the huge fleet unknown with Brexit and in times of economic uncertainty so why would any company want to expose themselves to taking on those risks?
“Therefore, unlike some industry commentators, I do not believe that finance lease is the right funding option at this time in the economic cycle.”
Finance lease, he said, had a degree of popularity with some organisations as it was the only form of leasing that appeared ‘on-balance sheet’ until the January 2019 International Accounting Standards (IAS) also brought contract hire into that requirement.
Mr Hill said: “Some businesses liked finance lease because it highlighted the strength of their balance sheets and operating performance in terms of earnings before interest, tax, depreciation and amortisation (EBITDA) reporting, but that issue no longer arises with IAS changes at the start of the year that brought contract hire on to balance sheets.
“I cannot see any logical reason why a business would want to expose itself to unnecessary risk when a fleet funding solution such as contract hire is available.”
Furthermore, Mr Hill continued: “There is significantly greater added value in contract hire because of the job that Activa Contracts and other suppliers perform in terms of driver management and delivering a range of additional services within a contract hire wrapper that may include maintenance management, accident management and many other functions.
“At Activa Contracts we do have ‘stripped down’ fleet funding and management options in our product portfolio that includes finance lease and optional ‘bolted on’ pay-on-use maintenance services, but take up is minimal. The leasing industry is well placed to manage vehicle operating costs and shifting the risks involved from lessor to lessee is seen by the vast majority of fleet operators as exposure to unnecessary risk.”