With interest rates low and inflation under control, it would seem unlikely that a fleet funding adviser could go too far wrong. On the other hand you could also argue that there is little opportunity to make substantial savings.

When advising clients on funding issues, we are still amazed how infrequently funding policy is reviewed. Whilst we would not expect full financial evaluation for each car, many clients still fund their vehicles on the basis of “that is the way we have always done it”.

Contract hire as a method of funding still continues to grow. Since August 1995, fleets have been courted with renewed vigour by companies that are only too eager to help them enter into leasing agreements. If we ignore the VAT benefits, what are the factors that make a company decide to contract hire its vehicles?:

• avoiding residual risk on disposal;
• accounting issues, i.e. is this on or off balance sheet?
• reduced administration;
• access to additional credit;
• access to greater purchasing power.

We are sure that you can think of more. However, despite the advantages, many companies are entering into contract hire agreements without giving any consideration to a sale and leaseback arrangement on their existing fleet.

Sale and leaseback is where the contract hire or finance company buys the existing fleet and leases it back, giving the above benefits for the entire fleet, not just the new vehicles. Companies may be reluctant to do this because the effort involved in making an immediate transition is deemed too great, or the savings too hard to quantify.

A major consideration when deciding whether to enter into a sale and leaseback agreement is how current interest rates compare to the interest rates which were prevalent when the fleet was acquired.

Interest rates are now low and many existing fleet vehicles are likely to have been purchased on some form of deferred purchase agreement, which was taken out when interest rates were substantially higher than the rates that would apply today.

If funding was achieved by a conditional sale or hire purchase agreement, then the agreement will need to be settled before a contract hire arrangement can be entered into. This will almost certainly involve the payment of an early settlement penalty, which will need to be factored into your considerations.

The decision to lease or buy is affected by the permanent disallowance applied to lease rentals when the retail price of the car when new exceeds £12,000. Usually this will mean that the VAT benefit derived from leasing becomes ineffective when the car reaches a value of around £20,000. As a result of this, the fleet’s more expensive vehicles should often remain on a purchase agreement, which will mean maintaining old purchase agreements or taking out new ones.

With finance becoming increasingly sophisticated and more companies entering the market, a good starting point would be to approach several companies and ask them to evaluate a small sample of your fleet. If the initial results point to savings, then the remaining vehicles should be evaluated. If there are no apparent savings, you will not have wasted a tremendous amount of time or effort, and can sleep soundly in the knowledge that your fleet is being funded correctly.