Taking the risk out of fleet maintenance

SOUTH African companies have traditionally favoured instalment sale finance as many prefer to own their vehicle, though this may not always be in their best interest.

Ryan Rittoff, head of fleet and asset finance sales at Bidvest Bank, says: “We focus on full maintenance leasing as we believe this offers the most benefit for our clients and it takes the hassle out of running a fleet.”

He says full maintenance leasing takes the risk out of the maintenance side of running a fleet as the financier assumes that risk. Also, the full maintenance leasing service provider is able to spread the maintenance risk across thousands of vehicles.

“The bank also takes the residual risk in the vehicle. This means that companies simply upgrade their vehicles at the end of the lease period and they do not have to worry about disposing of the vehicles,” says Rittoff.

He points out that vehicles are depreciating assets and are not part of companies’ core business.

Another advantage of full maintenance leasing is that the vehicles are off balance sheet from an accounting perspective.

“Financially it is more efficient not having depreciating assets on your balance sheet. Instead, the vehicles are an income statement expense as opposed to balance sheet entries,” says Rittoff.

David Molapo, head of Standard Bank Fleet Management, says full maintenance leasing has a low market penetration in SA when compared to markets such as the US and Europe, indicating that there is considerable room for growth in this country.

“Running a fleet of vehicles is a major expense and managing the costs of that fleet is critical for companies to be competitive. Therefore, full maintenance leasing has huge advantage for companies as they can contain and budget for costs while also shedding the residual value risk and keeping the vehicles off balance sheet,” says Molapo.

“But many people still have the mind-set of owning their vehicles and the industry needs to engage with companies and educate them as to the advantages full maintenance leasing has to offer.”

He says modern fleet management is about managing the business’ cash flow and full maintenance leasing is an ideal tool for achieving this objective.

Running a fleet of vehicles is a major expense and managing the costs of that fleet is critical for companies to be competitive

Nicholas De Canha, CEO of Imperial Fleet Management, says while instalment sales continue to be popular in the fleet finance arena, there is more interest in full maintenance leasing products.

He says the downside of instalment sales finance is that the vehicle is reflected on the company’s balance sheet as a depreciating asset and a debt.

Moreover, the residual value risk of the vehicle resides with the company. This means companies have to refinance or settle that balloon payment and probably also have to dispose of the vehicle.

However, in the leasing environment the bank retains ownership of the vehicle along with the residual risk.

“When companies lease their vehicles they do not have to show them on their balance sheets because they do not own the vehicles,” says De Canha.

“Once they have finished renting the vehicles they hand us back the keys and their obligations to those vehicles are ended.”

He says as the lease is a rental agreement, the bank/financier retains ownership of the vehicles and in the rare case of a payment default, the bank can pick up its asset with less regulatory time loss than with other forms of finance.

He says leasing means companies can focus their capital on where it does the most good. Moreover, as fleet management companies are specialists in their field they are able to perform the associated tasks better and more efficiently, taking advantage of economies of scale to ensure they have the best technology and personnel to support their role.

“We do not control drivers and organise route scheduling but when that truck goes in for maintenance we have the systems and expertise to check invoices properly. We have labour rate agreements with workshops and we know the price of parts.

“These are skills that are not easily put into a business, and if a company does this, the costs are much more than what specialists like ourselves can provide.”

Another concern is that shareholders are more demanding and they soon punish companies that have lazy balance sheets.

Says De Canha: “Capital deployed in the business makes the company 20%-25% return compared to full maintenance leasing charges of 8%-8.5%.”