Funding your fleet is an important business decision that can have a huge impact on the time you devote to running your business, managing your monthly outgoings and the overall value of your business.
Buying a fleet outright gives you assets that you can add to your books and sell in the future, should you want to regain some of your investment. However, as the value of your cars will decrease over time, and with the additional costs that accompany running a fleet, it’s worth thinking about alternative methods of payment, before you make any commitments.
Contract Hire
Contract hire allows you to hire your fleet at a fixed monthly rate for an agreed period and annual mileage. For example, you might get a fleet of cars on a three year plan for a 60,000 mile lease contract. Once your lease period is up, you simply hand the vehicle back to your supplier. When you lease out a new car, your supplier will specify the conditions you’ll need to return the car in, such as the condition of the car and mileage. After your contract is up, you’ll have the option to take a new contract for a new round of vehicles.
What you need to know
There are lots of benefits to contract hire. It can give you the option to take out a fleet of cars that might be out of reach financially if you purchased them outright. This is convenient if appearance and style is integral to your business. Another key benefit is that you’ll have fixed monthly costs, so you’ll be able to budget more efficiently, and you can claim back VAT.
As you don’t own the car, you’ll be less vulnerable to the risks associated with having valuable assets tied to your business, and you can hand over maintenance concerns to your supplier. But if you’re a new business it is worth remembering that these assets can be beneficial to your books.
Contract Purchase
Contract purchasing is halfway between leasing and making an outright purchase. It’s similar to contract hire, but works as a conditional sale, and is a good option for any businesses that would like cars that might otherwise stretch their budgets
J.Paul Getty, a famous American industrialist, once said: “If it appreciates, buy it. If it depreciates, lease it.” Contract purchase gives you the opportunity to steer clear of the financial loss that comes with the value of your fleet cars decreasing overtime.
What you need to know
On a contract purchase agreement, you make fixed monthly payments. Similarly to contract hire, this is based on the length of your contract and the estimated mileage you can expect to build up by the end of your term. Again, as with contract hire, you can add the cost of maintenance and accident management to your contract too. Once your contract is over, you have the option to return the car, or purchase it. The final payment you make will be based on the estimated value of the car at the end of your contract.
Finance Lease
A finance lease works in a similar way to contract hire, but the key difference is that the risk, management and maintenance of your fleet vehicles are your responsibility, even though you are technically leasing.
What you need to know:
This is a good leasing option for new fleet companies, as you’ll be able to add the value of your cars to your balance sheets, thereby increasing the net worth of your business. As with contract purchasing, final payment is calculated on the residual value of your cars. With financial leasing, you’ll have greater control as each month you’ll receive a fixed invoice and make a single payment.
Employee Car Ownership (ECO)
The Employee Car Ownership (ECO) scheme allows employees to have ownership of their vehicles. The scheme works by you funding your vehicles through a mixture of savings on tax and reimbursed mileage (according to rates approved by the HMRC). Employees make payments which cover the cost of maintenance, and the overall savings you make will scale based on the size of your business.
What you need to know:
ECO schemes can be complex, so it’s worth ensuring (as you should with any funding model), that you get expert advice tailored to your specific business. We’ve added some at the end of the article which we hope you’ll find helpful.
With ECO schemes, HMRC views the cars as being privately owned, so employees don’t receive tax benefits but they do pay a monthly contribution to the vehicles. It’s important to remember that HMRC have to approve each scheme, so there is extra administration that you’ll have to dedicate time to dealing with.
Finally, whilst the financial and taxation benefits of ECO are clear, you won’t be able to reallocate cars to different drivers. So it’s also crucial to monitor mileage levels.
Salary sacrifice
Salary sacrifice is another employee ownership scheme, and it’s one that has risen in popularity in recent years. The scheme works by employees sacrificing part of their salary towards the purchase of a vehicle. They then make savings through income tax and National Insurance.
What you need to know:
Unlike the ECO scheme, you are eligible for tax benefits in kind on this scheme. It’s good for keeping your business greener too, as the lower the CO2 emissions on your cars the less tax you’re likely to have to pay. Manufacturers and contract hire companies often offer reduced rates for businesses running salary sacrifice, and the scheme can come with accident, repair and manufacturing packages. In terms of your team, it’s an attractive offer for prospective employees and can increase retention.
On the flip side, if you have a naturally high staff turnover, it may not be the scheme for you – you’ll have to return the car and might be faced with early termination fees.
Finally, it’s important to consider your staff’s wages – ask yourself whether your employees are earning enough to make the ‘sacrifice’ worthwhile.
Choosing a financial package requires thought about the size and nature of your business. You’ll need to think about everything from the resource that can be dedicated to administration, to what you can afford and where you’d like your business to go in the future.
In addition, think about Wholelife costs, which we have touched on briefly. Wholelife costs are the overall costs of you running and owning your fleet. They include depreciation, maintenance, admin, company car tax and day to day running costs.
For help Business Car Manager, Fleet News, ACFO and Run Your Fleet all have useful advice. In addition, you can ask other fleet businesses similar to you own about their funding challenges. Finally it’s worth shopping around to get quotes and see the different policies on offer before you make that all important choice.
Content on this page is paid for and provided by Kia Fleet sponsor of the Guardian Small Business Network Accessing Expertise hub.
