By Simon Barter, head of SME at Lex Autolease
The improvement in the UK economy has brought about a return in confidence for SMEs. A key confidence index produced by the Business in Britain report – a bi-annual survey of 1,500 UK SMEs tracking the overall “balance” of opinion on a range of important performance and confidence measures – currently stands at 43 per cent, and this year should see small businesses across the UK fare much better than in previous years.
Although investment is top of the SME agenda, with more than half of UK small businesses looking to invest over the first half of this year, most firms cannot afford to be complacent. We are increasingly seeing them look at new, innovative ways to streamline their operations to free up cash flow for growth, and although small businesses will focus on making changes to infrastructure and technology, they should not lose sight of the impact company cars and vans may be having on their finances.
UK SMEs already have £6.7 billion locked up in depreciating vehicle assets and the Business in Britain report has identified new company vehicles as a key area of investment for 2015, particularly in the construction and transport sectors.
With fuel prices expected to rebound, together with loan payments and maintenance expense, it is easy to see how the cost of company vehicles can restrict growth, never mind the value depreciation. So how can you reduce your outlay on current vehicles and those you plan to invest in this year?
This comes down to the choice between outright ownership and non-ownership – either to buy or to lease. The traditional approach of purchasing a car or van outright is still as much an emotional investment as it is a financial one. However, as businesses look to become more cost efficient, leasing is fast becoming a preferred option, allowing firms to essentially disown the expenditure that often comes with owning vehicles and free up capital previously tied to the balance sheet.
When purchasing a vehicle, common opinion is that running it into the ground is the best way to get the best value out of the spend. The truth is that this is a false economy, with the car or van’s value depreciating from the moment it leaves the showroom. In time they can become a liability - draining cash from the business and requiring frequent maintenance and repair.
Through fixed monthly payments, there is a much greater chance of a business driving away with a premium make and model as opposed to what it could previously afford to buy outright, which can help attract new talent. When you take into account the tax and VAT benefits that come with keeping pace with leaner and greener car models – it is surprising how many drivers are unaware that CO2 emissions affect tax - it makes for a compelling argument.
The reality is that we see firms reducing upfront, maintenance and running costs to free up cash to spend on parts of the business to fuel growth, whether that be plant and machinery, new staff, premises, R&D or to simply free up working capital.
The movement towards non-ownership is growing. We saw a 29% year-on-year rise in the number of vehicles leased to SMEs last year, and in addition, businesses are providing new ways of sharing, borrowing, renting and swapping vehicles to save money. For those who are tied to the ownership approach, the choice between emotional investment and financial benefits can be difficult, but what is important is to make an informed decision on what is best for the business.