Don’t get stressed

It is a great time to enter into a finance agreement generally, as rates have been consistently low over the last few years and the consensus is that they are likely to start to increase in the foreseeable future.

A fixed rate agreement will lock in these low rates. Just make sure that as the end user you are entering into an agreement with a reputable supplier who has covered all their requirements for the duration of the agreement, especially if it is for a contract hire package.

HP or contract hire?

Hire Purchase allows users to spread the cost of purchase, at a fixed rate, with title passing at the end of the term. It may also have  the added benefit of allowing users to claim tax relief (up to certain limits) on the asset and the interest element, provided the business is profitable and paying tax – users should seek independent tax and accounting advice from their professional advisors. VAT is paid in full at the start of the agreement.

Contract hire provides users with assets at a fixed rate of interest (with controlled budgeting where a maintenance package is included). All rentals paid may be allowable against taxable profits thereby accelerating tax relief over the life of the agreement. Additionally the asset is not shown on the hirer’s balance sheet which may improve the return on capital employed. It provides the benefits of use of the equipment at a beneficial price while avoiding many of the risks of ownership.

Pitfalls to avoid?

The top priority should be to ensure that you are transacting with a reputable supplier and funder. The two industry bodies that ensure minimum standards are met are the Fork Lift Truck Association (FLTA), which represents the dealership side of the industry, and the British Industrial Truck Association (BITA), representing the manufacturers.

When it comes to funders, check that the financial institution is bona fide, regulated and committed to the materials handling sector. The relationship between a supplier and the financial institution will average around 5 years on most agreements so it is important to ensure long term commitment.

Can I get a good deal?

There are many component parts to a “good deal” which is influenced by the invoice price, residual value, maintenance required and the finance rate. It is a combination of all these elements that makes a “good deal”.

The finance rate applied by most of the mainstream funders in this sector will be very competitive and competition between dealers and/or manufacturers is considerable. This has resulted in competitively priced products and residual values. Interest rates remain low, a large number of good quality manufacturers are keen to increase their market share following some lean years and finance companies are looking to lend more. All of this means that now is a good time to upgrade to a new truck.

How important is flexibility?

Too much flexibility can limit the choice of trucks and suppliers available to end users. Normally the most competitive prices are based on longer term contracts of up to 7 years in duration. The price of any maintenance element will be based on the initial assessment by the supplier. Should the requirements alter significantly during the course of the agreement then the supplier should be approached to re-assess the application and usage accordingly.

Packages based on hours of use

This concept has not really taken off within the dealer network since the finance element of a lease needs to be priced over a term rather than usage of the trucks. The supplier would need to  ensure that the end user’s usage is sufficient to cover the depreciation and finance costs.  One alternative would be to price the maintenance element based on hours used. However, there is the risk that the end user’s application and usage changes which could make renegotiation of the maintenance messy and potentially very expensive.

Know your needs

A maintenance contract is usually signed that will detail the level of maintenance cover included as well as any penalties for excess usage. It is important to understand what is included and excluded from this maintenance contract so that both the end user and supplier know exactly what the expectations are and what extra costs can be incurred, if any.