1. Chapter 5 Vehicle Financing

2. STUDY OBJECTIVES At the end of this chapter students will be expected to: Have insight into investment analysis with regard to vehicle acquisition Name sources of capital for investments in assets Be able to discuss various financing alternatives Understand the factors influencing an organisation’s financial policy

3. 5.1 VEHICLE ACQUISITION 5.1.1 INTRODUCTION A company that operates a private fleet does so because it believes that the fleet can provide a return on the required capital investment.

4. 5.1.1 INTRODUCTION cont’ The return on the required capital investment can come from:  improved customer service,  cost reductions,  quality control, or  other benefits that create or preserve value.

5. Investments in plant, equipment, people, research and development, etc. should generate revenue that increases the after- tax cash flow, or they should reduce expenses, 5.1.1 INTRODUCTION cont’

6. 5.1.3 FUNDING CAPITAL ASSETS The main investment sources for the financing of capital investments are:  Revenue earned from operations.  Secured debt - mortgages, debt backed ‘by collateral in the form of equipment, or other investments.  Unsecured debt - bonds and other paper obligations which the undertaking gives lenders in exchange for money.  This source of capital is normally backed by earnings, trends and the reputation of the undertaking.

7. 5.1.3 FUNDING CAPITAL ASSETS cont’  Issuing preferred or common stock.  Good earnings and dividends history is important to keep the stock attractive.  In South Africa a number of well-known transport companies are listed on the Johannesburg Stock Exchange, for example Cargo Carriers, Putco, Trencor, and Unitrans.  Traditional financing techniques - contract hire, outright purchase, installment sale, leasing, and a combination of financing techniques.

8. 5.2 VEHICLE FINANCING 5.2.2 FINANCING ALTERNATIVES (a) Lease Financing Vehicle leasing is the leasing of the use of a motor vehicle for a fixed or indefinite period of time. The key difference in a lease is that after the lease expires, the lessee must return the vehicle to the dealer or buy it.

9. (a) Lease Financing cont’ Purchases can be done without touching the cash reserves or influencing future investment policies. It is Therefore possible for the undertaking leasing vehicles to replace vehicles at regular intervals without the burden of a large capital outlay.

10. The fleet is more reliable as it is frequently replaced, maintenance costs are minimised and the appearance of the fleet remains of a high standard. Leasing is based on the principle that availability for use is more important to the aims of production, than is the owning of an asset (e.g. a vehicle). (a) Lease Financing cont’

11. Payments (premiums) are done on a fixed monthly basis and do not fluctuate unless so decided by the parties. A profit for the leasing company is included in the premiums. (a) Lease Financing cont’

12. 5.2.2 FINANCING ALTERNATIVES (b) Instalment sale (suspensive sale agreement) An instalment sale is a suspensive sale agreement in terms of which the cost of an article together with interest thereon can be repaid in instalments over a predetermined period of time, ownership only passing to the purchaser when all instalments have been paid.

13. 5.2.2 FINANCING ALTERNATIVES (c) Cash financing (outright purchase)  The fleet owner pays cash for a vehicle at the moment when the vehicle is purchased.  Part of the payment may be the trade-in value of the used vehicle.  Ownership is immediately carried over to the fleet owner and the fleet owners replacement time is fully flexible.

14. 5.2.3 RENTAL/HIRE In the case of the acquisition (use) of an asset by means of a rental agreement, ownership of the asset remains with the finance house while the right to operate the asset is vested in the user. Rentals can be over the short or the longer term.

15. 5.2.3 RENTAL/HIRE cont’ Vehicles can be obtained by the operator under a contract hire arrangement thus remaining the property of the contract hire company for the duration of the contract. Contract hire periods could be for up to five years and a number of vehicles could be obtained in this way.

16. Rental terms are normally negotiated between the parties. The total cost of these agreements are affected by items such as:  kilometre charges,  charges in excess of agreed monthly kilometres,  vehicle damage clauses and the effect thereof,  insurance cover provided,  method of payment, etc. THE END 5.2.3 RENTAL/HIRE cont’