Small fleet leasing: Untapped
potential

Ashley Martin looks at small fleet leasing, and finds that
there is huge room for growth in sub-25 vehicle fleets – if only
SMEs can be converted from cash
 
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Tradition dictates, in many cases, that businesses operating a
handful of company cars and vans buy those vehicles. However, for
many of Britain’s contract hire and leasing companies, working
singularly and in tandem with brokers, businesses operating a few
vehicles remain a target market as they look to expand their
business.

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 Put simply, says Masterlease, one of the UK’s largest vehicle
providers, contract hire offers small businesses significant
cashflow, maintenance, administration and disposal benefits.

 With SMEs making one pre-agreed monthly payment that covers
all vehicle costs with no surprises or disposal headaches at the
end of the agreed lease period, contract hire is predictable,
planned and removes risk from the business as well as providing not
insignificant VAT benefits.

 Given such clear business advantages, why is it that so many
small businesses continue to outright purchase – a simple choice,
albeit one that can potentially cost a business thousands of
pounds?

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The Business Car Perceptions Report 2007 written by
Professor Peter Cooke, KPMG professor of automotive studies at the
University of Buckingham, and published in association with global
management and technology consulting company BearingPoint, suggests
that at least half of all companies running 11-49 vehicles favour
outright purchase as their preferred funding mechanism (chart 1)
with the vast majority of firms saying that they have no plans to
change over the next two years (chart 2).

 Cooke writes: “One might have expected [contract hire] to be
more popular among smaller fleets, given the range of services it
can offer.”

Nevertheless, he adds: “Leasing companies are increasingly
targeting smaller fleets, as this sector offers the largest
potential for growth. New business models are being developed to
help penetrate this sector cost-effectively, and new tools are
coming on stream for client management.”

 Given the size of the SME market, leasing companies along
with their broker networks are using all the tools in their armoury
to convince businesses operating a few vehicles to switch from
outright purchase.

As Gary Killeen, commercial leader at GE Capital Solutions, Fleet
Services, says: “The small business market is potentially huge.
There are 4.3m businesses employing less than 50 people in the UK
according to the Federation of Small Businesses and they account
for 99.9 per cent of the business population.”

 Simon Staton, sales director of Venson Automotive Solutions,
comments: “Companies operating small fleets have a culture of
vehicle ownership. Despite the advantages of leasing – cost
savings, budgeted monthly motoring and tax efficiency – the leasing
industry has found it difficult to encourage the majority of small
fleets to change their purchasing procedures.”

However, he adds: “Running a small fleet is not a core business
activity, although the vehicles may be important to a company’s
operation. Therefore it is very unlikely a fleet manager will be
employed.

 “Consequently, there is undoubtedly a need for an outsourced
fleet management service because no-one internally has the time,
inclination or expertise to run the fleet in the most cost
effective and efficient way while taking account of changes in
fiscal rules and legislation. This is particularly important if
small fleets are to adopt best practice in respect of current key
operational issues such as managing occupational road risk and
carbon footprint reduction.”

Who is in charge of fleet?

But, according to Greg Taylor, commercial director of ING Car
Lease, one of the biggest challenges facing the leasing industry is
its ability to target the right decision makers within the smaller
fleet category. 

 He said: “While larger fleets usually employ fleet managers
or other appropriately named individuals to administer the
acquisition, management, maintenance and disposal of vehicles,
owner-managed businesses look after their fleets in a much less
structured way.

“While one business will leave fleet management up to the managing
director’s PA, another will hand this task to the financial
director or the MD themselves. Hence, it is very difficult to
engage with the decision-maker in many instances.”

 As a result, Taylor says: “It’s very frustrating for many
leasing companies, who know that they can do a superb job for
smaller fleets, but find it almost impossible to get through to the
right person within that organisation.”

While targeting the key decision-maker is one issue to overcome, a
long-held tradition of outright purchase, coupled with educating
small company bosses about the financial benefits of leasing
remain, are perhaps the two other key fundamentals factors to
defeat in the leasing companies’ battle for SME business.

 Mark Hindle, managing director of Blackburn-based MNH
Platinum, observes: “Small fleets are frightened of change. They
have the perception that contract hire is for major fleets and not
for them, which is not the case.

 “We actively target companies operating small fleets and we
go and see them and talk to them about vehicle leasing. However,
larger leasing companies are not prepared to go and see these
businesses face-to-face.”

 Nevertheless, Hindle admits that the small fleet sector is a
difficult market to crack. He said: “Companies operating 100-plus
vehicles have to put their faith in a fleet supplier because staff
do not have the time to run the whole fleet themselves.

“That view is not true of companies running 25 vehicles even though
it is usually the managing director’s secretary who is in charge of
the vehicles, which are worth about £500,000.

“A company would not put that person in charge of £500,000 worth of
machinery so why put faith in them to effectively and efficiently
run £500,000 worth of cars? It is because these companies do not
typically view vehicles as a business essential, but they
are.

“Small fleets need to undertake a complete root and branch review
of their whole fleet operation. They will discover that by working
in partnership with leasing companies that financial savings can be
made, fleet management processes will improve and compliance with
operating best practice will ensue.”

Long road to conversion

If the Business Car Perceptions Report 2007 survey is right that
less than a fifth of companies operating 20 or fewer vehicles plan
to change their acquisition method it promises to be a long haul to
change hearts and minds, particularly as those businesses that do
plan to change say they will opt for cash for car or an employee
car ownership scheme with only a handful pursuing contract hire.
However, as GE Capital Solutions points out, a fifth of the small
fleet market prepared to consider funding alternatives to outright
purchase equals thousands of companies and potentially hundreds of
thousands of vehicles.

 It is for that reason that numerous vehicle providers are
specifically targeting the SME sector.
ING, which has around 47,000 funded vehicles, has a department
especially established to meet small fleets needs and Mr Taylor
said: “We now have over 500 smaller fleets on our books, which
accounts for about 10 per cent of our total fleet, so clearly, this
size of business is viable to us.  
 “Many smaller businesses assume that their only route to
acquiring vehicles is via a local broker or through a franchised
dealer. In reality, companies like ING could offer a really
competitive monthly rate, based on the built-in efficiencies we can
bring to bear thanks to our buying power, experience and knowledge
of the fleet business.”

Going through brokers

Meanwhile, Lombard Vehicle Management is taking a two-pronged
attack to the small fleet sector using brokers – the company was
recently voted Best Motor Vehicle Finance Provider by the National
Association of Commercial Finance Brokers – and its Retail and
Commercial division. Through an asset finance network of 27
regional offices, the provider says that local expertise and
personal contact is backed up by a resource of hundreds of experts
within the bank.

Brokerages remain a ‘key tool’ for reaching the sub-25 fleets and
the company recently relaunched its ‘Partner Programmes’ giving
brokers reasons for dealing with Lombard other than merely
price.
 Chris Black, Lombard’s director, introduced and consumer
sales, said: “We are fully integrating them into the company’s
service and support model, offering an ongoing rewards programme,
providing marketing expertise, using [parent company] Royal Bank of
Scotland Group’s buying power to source vehicles highly
competitively on their behalf, and offering them the special deals
that small fleets want.

“These measures not only work but are essential. Sub-25 fleets are
difficult and expensive for large leasing companies to reach, but
economical for brokers because of their lower cost to market.
Brokers are also able to be nimble and quick to respond.”

Black adds: “We launched a dedicated SME fleet campaign with
special deals on Ford vehicles earlier this year, and this sort of
initiative will continue.

“The key to success in the sub-25 sector is to reverse the process
by which businesses acquire vehicles, ensure that the leasing
option and rationale is present and fully considered at the start
of the fleet procurement process, and that we understand the needs
of each business, no matter how small. We have been investing
significantly in this area and the result is that we have seen
growth of around 90 per cent in the sub-25 sector this year through
retail and commercial, and 25 per cent via brokers.”

 ALD Automotive plans to target the SME sector in 2008.
Managing director Keith Allen notes: “We believe companies
operating fewer than 20 vehicles offer a major opportunity,
particularly in terms of providing them with easy to monitor,
monthly budgeted motoring. Many of these businesses continue to
outright purchase vehicles leaving themselves open to service,
maintenance and repair costs that have not been included in
budgets.”

LeasePlan subsidiary Network provides funding in the fleet broker
market, and director Christophe Desplace believes the tide is
turning away from outright purchase.

“Although a lot of small fleets still use outright purchase,
more are looking to fleet brokers instead. These providers are
generally SMEs like themselves, so instead of dealing with a
monolithic leasing company they’re talking with someone who has a
genuine appreciation of their main concerns and priorities.

“This allows small fleets to enjoy the benefits of leasing, plus
the advantages of a personal relationship with their provider. If
they need to call up their supplier on the weekend, for example,
they’ll often speak directly with the MD rather than getting
shuffled off to an automated call centre.”
Graham Hill, who launched West Sussex-based brokerage GHA Finance
25 years ago, is convinced personal contact is the key to
encouraging SMEs to turn to leasing: “The convenience and
cost-effectiveness of leasing is not getting through to small
fleets. Some vehicle providers who use the internet advertise such
competitive rates that SME bosses react with disbelief. They then
walk away because they don’t understand how such an offer can be
made compared to an arrangement via their local dealer.

“It is up to the leasing industry to educate the SMEs about the
benefits of contract hire and to use the broker networks to
penetrate the sector, because that is far more cost-effective then
employing salesmen.”

With major contract hire and leasing companies increasingly
establishing broker networks, Stuart Fraser, managing director of
Avail Car and Van Leasing, believes small fleets are waking up to
the monthly rates available as a result of list price discounts
unobtainable via local dealers.

“The major leasing companies have formed their own broker networks
to target small fleets and set brokers up with software systems to
deliver instant quotes. There are about 1,000 brokers in the
country and most have contracts with the major leasing companies,”
he explains.

However, he adds: “Many small fleets don’t have a relationship with
a broker and they feel more comfortable going to their local
dealership viewing and test driving a car and then negotiating a
price. They view price as important but service as more
important.”

Red tape: A boon for lessors?

Ultimately, though, the move to convince SMEs to lease vehicles may
only be partly a budget and cash-saving issue.

With an increasing amount of health and safety and environmental as
well as fiscal legislation, directives and protocols from Brussels
and Whitehall impacting on corporate vehicle operations, it is
widely believed that the quest to conform with the law and best
practice will drive some SMEs into the leasing arena.

As ING’s Taylor says: “We are seeing something of a shift in the
smaller end of the market as the risks associated with health and
safety issues come to the fore. We are increasingly finding that
the sub-25 fleet sector is turning to well-respected leasing
companies to help them through the burden of legislation that is
increasing every year on businesses that run fleets.

“In the end, the biggest issues facing smaller businesses is risk,
in terms of financial exposure and the safety of its people, and
cashflow. Increasingly, companies are asking themselves, why they
are spending so much money on depreciating vehicles, using up so
much of their people’s time on organising costly maintenance
programmes and investing so much time implementing health and
safety strategies that they don’t really understand.” 

It’s a view shared by Robert Kingdom, Masterlease’s head of
marketing, who comments: “The challenge for the fleet industry is
to make the contract hire message simple and targeted enough that
it becomes an irresistible proposition and the priority for SMEs in
driving savings and efficiency as well as best practice in terms of
health and safety regulations and a company’s duty of care.”

Freeing up capital

In conclusion, the drive to convert SMEs to leasing is summed up by
Lombard’s Black, who says: “If vehicles are leased then capital is
immediately freed up for investment in the core business. In
addition, most companies purchasing vehicles simply don’t grasp
that a leasing company will manage the supply chain, which is
especially important where commercial vehicles are concerned.
 “We will also choose the most efficient and appropriate
vehicles, relieve the day-to-day administrative burden, provide
basic management information and offer advice on the raft of
regulations, which even a very small fleet now has to
satisfy.

“We have to make efforts to educate and inform, demonstrate the
business case and make it easier for small businesses to access
lease finance.”