Common Issues Common Issues

There are 2 big variables that need to be considered before any firm decision on funding is made. The first is the matter of a projected residual value and who is carrying the risk. This needs to be understood very clearly: it may be attractive to have low instalment or rental payments because of a high residual value built into the calculations, but if this figure is not realised when the vehicle is finally sold - who carries the loss?

As we have seen in the used car market of mid- to late 2008, a depressed market means lower residuals and actual losses result. If the supplier is carrying the risk, will he be able to meet all reasonable results? If the fleet operator is carrying the risk, has this been properly assessed and allowances made?

Clearly there is a difficult scenario where the fleet thinks there is no risk, but on disposal is faced with a large bill from the funder to make up the difference between the projected residuals and the actual results.

The second major point is the effective interest rate charged in the agreement. This is the difference between the actual vehicle costs of depreciation (original cost less actual sales proceeds) and the installments or rentals. Of course the total costs are what matters, but the calculation of the effective interest rate will give some measure of the actual competitiveness of the whole deal - and is therefore useful when comparing suppliers.

As set out in Section 6 (Operations) in this series, the UK fleet supply chain provides a range of services such as maintenance, fuel and accident management packages to support the basic funding arrangements. So there are many options to deliver just the car or van; or the whole system, depending on requirements and preferences.

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