While big corporations are well aware of the advantages and drawbacks of operational leasing – often referred to as contract hire or full‐service leasing if it is provided with a comprehensive package of support services – this is not necessarily the case so far as small to medium‐enterprises (SMEs) are concerned. As a consequence its penetration of SMEs in some countries is surprisingly low.

“Operational leasing has still got a lot of potential to grow among SMEs in

France, Italy and Spain for example,” says Stephane Renie, sales and business development director at ALD International.

“As things stand they often prefer to own their own vehicles, more out of custom and habit than for any other reason,” he suggests.

“In France and Belgium the SME penetration may be as low as 5% to

10%,” says Bart Beckers, chief commercial officer at Arval. “By contrast, however, penetration in the Netherlands and the UK is a lot higher.”

“Russia on the other hand remains very much an acquisition market,” says Renie.

Can contract hire benefit SMEs?

The benefits contract hire offers an

SME are much the same as those it offers to a large multinational group, despite their differences in scale.

It allows customers to outsource the acquisition, taxing, maintenance and disposal of vehicles and potentially reduce their costs as a consequence. Fuel cards and accident management are among the other add‐ons that are available.

“You’re outsourcing stuff that is noncore and that you may not have the staff to handle yourself in‐house,” Renie comments.

“Contract hire brings cash flow benefits too when compared with outright purchase or hire purchase,” says Simon

Japan with the aim of fostering global vehicle leasing growth.

“Cash flow can be a real issue for SMEs,” Renie remarks.

“Contract hire is another line of credit and makes forward budgeting easier because you are paying fixed monthly rentals for the next three or four years,”

Oliphant says. “In fact you are paying a single monthly invoice for everything.”

“This can be beneficial for companies that are looking for financial stability,” says Uwe Hildinger, chief commercial officer at Alphabet International.

“You’re not spending your own capital which means you can invest in, say, research and development instead,” Renie observes.

There may be VAT benefits too, Oliphant adds. “Leasing charges are treated as operating expenses and are therefore taxdeductible,” Hildinger comments.

Furthermore, the fact that a contract hire agreement involves regular servicing and ensuring that a car is roadworthy helps companies discharge their duty of care to their employees.

It reduces the exposure of fleets to financial risk so far as residual values and unexpected expenditure on mechanical repairs are concerned and allows them to take advantage of the buying power the big leasing companies enjoy. “You can obtain good discounts on parts, workshop labour and breakdown services,” says Oliphant.

Bulk purchase cost benefits

“We have 1.5m vehicles on our books and we buy thousands and thousands of cars and thousands and thousands of items such as tyres annually so we have the benefits of scale,” says Jaime Requeijo Gutierrez, senior vice‐president, business development, at Lease‐Plan. “As a consequence we can leverage costs downwards so that they are as low as they can possibly be and we can pass these savings on to our customers.”

Those customers can also benefit from LeasePlan’s expertise if they need advice on which vehicles to choose for particular applications and where best to get them maintained; expertise they may not have in‐house. “Running a fleet of cars is not their core business after all,” he remarks.

Purchasing clout means that car manufacturers and dealers are more likely to respond favourably to a complaint from a big leasing company than they would if the same complaint were to be filed by a small business, says Oliphant. “If a dealership has had a car in five times with the same problem and hasn’t fixed it yet then a lessor can put pressure on the manufacturer to sort it out and if necessary get the car replaced,” he observes.

Businesses may of course be wary of entering into a full‐service lease because they may fear they will be penalised if they have to terminate it early.

“Remember that you are signing a contract covering an asset that does not depreciate lineally,” Gutierrez observes.

“It may depreciate by as much as 30% over the first 12 months.”

To allay these concerns lessors have developed a variety of packages that allow for early termination; but there is still a price to pay.

Rental alternatives?

Arval for example can provide vehicles on what Beckers describes as a mid‐term rental basis for up to 24 months. It is a bit more expensive than one of the company’s more conventional contract hire agreements he says, but can be terminated at any time; and the longer the client keeps the car, the more the monthly rate goes down.

Only the most popular cars that can easily be switched to one of the leasing company’s other clients are likely to be available under such a deal.

Customers may also fear that they will be penalised for every minor blemish when the vehicle is returned. The policies pursued by lessors have changed significantly over the past few years, however, with the use of independent arbitrators and the advent of clear, agreed, guidance as to what constitutes fair wear and tear published by the sector’s trade associations.

“In some markets we offer fair wear and tear insurance,” says Gutierrez. “We charge a monthly fee to cover the client against the cost of, for the sake of argument, the first €1,000 worth of any repairs that may be required.”

The risk of course is that fleets will take less care of their leased vehicles than they did previously, safe in the knowledge that the insurers will pick up the bill. “We’ve seen no significant change in behaviour so far though,” he remarks.

At present contract hire is viewed as offbalance‐ sheet finance, although that will change from 2019 onwards so far as many major public companies are concerned, says Beckers. How contract hire is treated for balance sheet purposes is not a significant influencing factor when SMEs make their funding choices, he believes.

“It’s more about outsourcing and the accompanying package of benefits,” he contends.

Challenging contract hire markets

Are there any markets where local conditions make it impossible for contract hire to be introduced?

“China can be a challenge because leasing companies are constrained by the need to obtain the necessary number plates first and that isn’t always easy,” Beckers replies. “Arval has a joint venture with a local company now, which helps, but contract hire in China involves the provision of drivers; and is as much about managing them as it is about managing the vehicles.”

“China is still really about outright acquisition,” says Renie. “The take‐up of contract hire remains very weak, one reason being that until recently the tax treatment varied from province to province and city to city.”

Countries can change however, he stresses. “Tax changes in Mexico for example mean that contract hire’s penetration is on the increase,” he states.

Mobility packages – a challenge for contract hire?

While lessors still seem confident that contract hire will grow in popularity, its

growth could be curtailed if mobility packages catch on.

They involve the allocation of a budget that employees can use to get themselves from A to B, and not necessarily by car. It can be spent on rail, tram, or bus tickets or perhaps on buying or hiring a bike instead; ideal if your job involves getting around a big, cyclefriendly city such as Amsterdam, the capital of the Netherlands, which has a well‐developed public transport system.

When a car is used it may be on a sharing basis, with vehicles not permanently allotted to particular individuals.

One out of eight company lease car drivers – 13% – is interested in corporate car sharing according to a recent study commissioned by LeasePlan covering 17 countries. That compares with less than 10% a year ago.

Car sharing schemes

The highest level of interest – 16% –is among males aged between 18 and 34.

“There is a tendency in favour of subscription‐based products and services and an increasing demand for sharing solutions, especially among younger working professionals in large cities where parking costs and living expenses are high,” says LeasePlan chief commercialnofficer, Nick Salkeld.

It has just introduced SwopCar, a new car sharing service.

Initially being piloted in the Netherlands and Luxembourg and set to be deployed globally during the coming months, the technology behind it gives eligible employees access to an online reservation platform and smartphone app. That enables them to check vehicle availability and plan their trip accordingly.

The entire process is self‐service.

Cleaning, maintenance and refuelling are taken care of by LeasePlan’s network of service providers.

Usage data is recorded so that costs can be calculated and passed on to the department or employee concerned.

Other leasing companies are offering mobility and sharing packages too; so if demand for contract hire does eventually decline, they will be ready with some suitable alternatives.