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Past Issues

February 2005

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Finance

FleetWatch Quick Guide to Financing Trucks

Some important questions to ask before deciding how best to pay for your trucks

Objective

• Strive to conserve cash resources.

• Use cash resources conservatively.

• Try to attain the lowest total operating cost. 

• Keep administrations flowing from the method of finance simple.

Planning

• Does the method you favour contribute to maintaining a sensible replacement cycle?

• Ensure you will enjoy the best trade-in prices and ultimate resale values.

• Do you benefit from meaningful buying power?

• Have you gained a complete understanding of the various financing options that are available to your business?

• Be aware that regardless of the method you choose, paying for vehicles is a major expense with significant impact on your cash flow and taxes.

Rate the importance of these in your business

• Immediate ownership or just unrestricted use of vehicles?

• Ultimate ownership of vehicles or not at all?

• Flexibility - the option to choose when vehicles will be replaced.

Cash Flow -What suits you best

• Purchase the vehicle.

• Pay the full amount immediately or in periodic instalments over 48 or 60 months?

• Would some other timeline such as quarterly payments be better for your business?

• Are there presently any other investments that should be made rather than paying for vehicles?

Options to Consider

• Outright purchase paid in cash or loan (such as a bank overdraft facility or fixed period loan)

• Instalment sale. A credit agreement also known as a suspensive sale permitting unrestricted use of the vehicle while it is paid for over an agreed period. Ownership passes only when the last payment has been made.

• Leasing. There are various leasing structures to suit different cash flow needs. Lease rentals are paid over an agreed period, use of the vehicle is unrestricted. However, ownership does not pass to the lessee on termination of the lease agreement.

• Extended rental agreements, also known as an operating lease, can include maintenance if requested. Ownership does not pass to the user.

When considering the advantages and disadvantages of the various options, make sure the service providers of your choice explain and disclose all relevant aspects. These include;

• Final purchase price.

• Period of agreement.

• Interest rate and whether it is fixed or floating.

• The amount of any balloon payment (last payment or residual value) that may be included.

• When payments are due - at the beginning or end of each period (month).

• Whether you may extend the agreement for a further period.

• Are there any penalties in the event of early termination?

• Who is responsible for insurance and what it should cover.

When maintenance is included in an extended rental agreement:

• Find out the applicable rate

• Determine the rate that will be charged for excess kilometres.

• Get references and feedback from existing and recent clients.

• Make sure the location and access to maintenance and technical support is acceptable.

• Ask yourself if you can build a long-term mutually beneficial business relationship with the service providers you chose.