Funding Methods - Outright Purchase

Risk: You assume risk.

Market Share: Around 20%.

Popular With: 1000 vehicle+ fleets. Typically cash-rich companies in such areas as banking and finance, pharmaceuticals and manufacturing. Vehicles are financed from deposits or loans. The operator takes the risk of maintenance, repair and disposal values, but can give day to day responsibilities to a fleet management company, for a fixed monthly fee.

Advantages:

Ø Perceived flexibility: vehicles are bought and sold as needed, without fear of penalty charges.
Ø Low funding costs: if cash comes from deposits.
Ø Writing down allowances: 25% of the capital cost of the vehicle can be offset against tax each year up to a maximum of £3,000 per annum.
Ø Vehicles are on balance sheet.

Disadvantages:

Ø Cashflow: significant front end costs may divert money away from being invested in the company. There's a minimum opportunity cost - what the money might be expected to earn if invested - of around 8%.
Ø Exposure: the fleet becomes vulnerable to residual value variations and exceptional maintenance costs. This method of funding needs high calibre expertise to manage well.
Ø VAT only recoverable if vehicles are used 100% for business.

Summary:

Popular with large organisations which can enjoy economies of scale and spread the risk over a large number of vehicles. However, less than 5% of fleets with fewer than 50 vehicles buy outright and that's likely to decrease in future as purchasing loses ground to Contract Hire.