At long last, it seems as though British small and medium-sized businesses have reasons to be feeling pretty optimistic for the future.
Conditions are improved, confidence is growing and appetite for investment is increased. The shift from survival mode to growth is long overdue, but a stumbling block remains: namely the £6.7bn British SMEs have locked up in depreciating vehicle assets.
Yes, you read that correctly. Once initial outlay and depreciation are taken into account, the cost of owning vehicles runs into billions. This finding is just one of many from our recent research into the views, beliefs and perceptions of over 250 senior SME decision makers towards commercial vehicle ownership and leasing.
Let’s talk numbers. There are currently more than 1.5m vans and light commercial vehicles (LCVs) registered to businesses in Britain. The majority of those are owned by SMEs and financed by cash reserves or bank debt. With the average replacement cycle of a work van or LCV being just four years, it is easy to see how the cost of ownership can build quickly into significant outlay over time.
Why do businesses persist with vehicle ownership? Put simply, the emotional pull of ownership still proves strong. More than three quarters of the SMEs we spoke to told us they still want to buy their vehicles. In addition, almost 25 per cent said they preferred to manage a single lump sum outlay than impact monthly cash flow with regular smaller payments. These factors, amongst others, are currently driving vehicle ownership, but is it the best option for businesses? The financial implications would suggest otherwise.
Freeing up the capital lost through vehicle ownership has the potential to transform these businesses. We asked SMEs what they’d do with the savings made by switching to leasing, with answers showing their ambition and appetite for growth. Some 43 per cent would invest in supporting working capital, whilst almost a fifth (18 per cent) would opt to reduce debts and overdrafts. Others said that marketing (15 per cent), IT infrastructure (15 per cent) and recruitment (5 per cent) would be top priority. The breadth of opportunities vehicle leasing could open up for British businesses is considerable.
We also spoke to a number of businesses who already lease vehicles to find out the drivers behind their decision to lease rather than buy. The primary motivation for over half was to avoid the high upfront cost of buying, and a further third cited the avoidance of asset depreciation. Despite this, over 25 per cent of non-leasing businesses still think leasing vehicles is too expensive, with many believing that buying a used vehicle is also more cost-effective than leasing, despite the evidence that this is often not the case. It is clear there is plenty of myth-busting still to do.
In many cases, leasing can prove a cost effective and manageable solution for growth in the long term. It is simply a case of ensuring SMEs are aware of it as an option. Only then can businesses make an informed decision about how best to invest their hard-earned capital and fully play their role in the wider economic revival.
Tony Murtagh is head of SME Direct at Lex Autolease.
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