Why do European SMEs opt for full service leasing?
Why do European SMEs opt for full service leasing?
There are more than 20 million (SMEs) independent companies and professionals in Europe, making 99% of the business fabric in Europe (1). In general, almost 90% of these companies have between 1 and 9 vehicles in their fleet. As they used to buy their own company car, a study from the Corporate Vehicle Observatory showed that 14% prefer to opt for full service leasing (2). How can we explain this shift?
What is a SMEs profile in terms of vehicle mobility?
In the SME fleet, vehicles present in general an average of 6 years of age before being replaced. But from country to country the trend may differ; in the case of the UK being less than 5 years but at the opposite, almost 7 years in Spain. Overall, European SME decision makers are confident that their fleets will grow moderately until 2020, even if moderately which may indicate confidence in economic activity.
How are European SMEs financing their fleet?
The market seems to be fragmented between ownership and lease. At present, about 57% of SMEs prefer to own, opting for 45% for own purchase and 12% for car loans. Regarding the lease, the option for financial leasing reaps almost 30% of the preferences of SMEs, and 14% for full service leasing.
If we look at the evolution of these financing methods over the last few years, since 2013, full service leasing has increased by 2 points, as opposed to own purchase or financial leasing, which also decrease.
What is Full Service Leasing?
Full Service Leasing (FSL) consists in the long-term rental of a car by a company or independent professional for a limited amount of time (usually between two to five years), leaving the burden of selling the used vehicle to the leasing company. This period and the monthly rents are set by the leaser and the company according to their needs. Indeed, the company’s mobility habits and expectations determine which car model and related lease services (maintenance, telematics, etc.) will be ordered.
But ... do SMEs know about Full Service Leasing?
This solution, which was initially adopted quickly by large companies, now reaches a level of notoriety of around 60% in the more mature European markets. The reason why European SMEs opt for this solution has to do with cost predictability, i.e., monthly fixed cost. Speed in the delivery of the vehicle is also a fundamental criterion for the selection of the method of financing.
How does Full Service Leasing work?
FSL is inherently designed to lower the costs of company car leasing through economies of scale. Indeed, lessors rent hundreds of thousands of business cars per year. Any single car lease deal implies the purchase of a vehicle directly to manufacturers. Such purchasing volumes significantly decrease car prices for lessors.
The same logic works for maintenance and other lease services. Lessors set up large-scale agreements with car maintenance networks, raising quality standard and lowering each maintenance costs price. And of course, as a lessor orders massive volumes of services to its maintenance partners, you are yourself considered as a premium client: first served, highest quality of service.
Lower prices are driving Small and Medium-sized Enterprises towards Full Service Leasing
Price is, of course, SME’s key concern. According to the Corporate Vehicle Observatory (CVO), 14% of European SMEs now prefer FSL to other company car financing schemes. Though legacy car purchase is still being preferred, its market shares among SMEs are declining in favour of FSL. Why? The CVO found in 2017 the price (i.e. the monthly rental) to be the most mentioned criterion by European SMEs when justifying their funding practices.
Along with the economies of scale mentioned above, most of surveyed European SMEs perceive car management, be the car part of a fleet or not, as a time-consuming task which impinges on their business growth. Yet, this is a side-activity that may be entrusted efficiently to a lessor which will handle the whole vehicle’s lifecycle, from the purchase to its maintenance and final sale. That is how European SMEs make savings over their mobility costs: for instance, about 10-15% less per car in France than any other financing scheme (purchase, leasing with buying option, etc.). This is about saving time and leaving non-core activities to specialised organisations.
This is also about paying for the full use of the vehicle and nothing more: driving a car and making business. Indeed, as price and lease services are set as soon as the vehicle is selected and the rental period determined, anything that may happen is managed by the lessor himself: accidents, maintenance, tyres replacement... Hence, FSL prevents unexpected business disturbances and related problem-solving work from turning into financial losses.
Everything is known in advance
Uncertainty could be the word most closely associated with driving: company car owners hardly ever know how much they shall pay for how many accidents, breakdowns and maintenance operations when they buy their vehicle(s). FSL works the precise opposite way: it implies a fixed monthly amount thoroughly calculated by the lessor for the whole time you will use the car(s). Concretely, a SME will pay the very same amount per month for two to five years allowing full predictability over that duration and easy cash flow management.
According to the CVO, this advantage is the main driver of companies shifting from purchase to leasing, being particularly convenient to new-born and/or small companies. These are more likely to be shaken by unstable cash flows, that FSL helps to regularise.
And there is something new: telematics
Telematics use is on the rise. Over 10% of European SMEs are already using telematics. In the Dutch and UK markets the adoption levels of this solution reach 20%. The reasons why SMEs use these services are primarily to locate vehicles for the purpose of anti-theft, to improve driver safety and optimize daily routes for employees. It has also been found that this technology could capture the interest of SME managers if it contributes to the reduction of insurance premiums.
Integrated solutions of on-board telematics process automatically and in real time the vehicle’s data. Solutions, such as Arval Active Link, capture a large amount of data about the use of the vehicle in the respect of private life. In this way TCO (Total Cost of Ownership) can be controlled and driver’s security increased thanks to the collected data. Telematics can measure fuel consumption on short trips, a level of precision allowing fleet managers to check fuel expenditure per driver, in case of shared vehicles. A direct alert to the fleet manager in case of suspicious variation of fuel level in the tank, or an inconsistency in fuel card transactions may be useful to detect a fuel fraud. And real-time maintenance and defect alerts can prevent from any bad surprises.
It is even more useful in some sector accustomed to high rates of theft: telematics allows, among other things, car geolocation. According to the CVO, this option is acclaimed by European SMEs, especially those which employ sales representatives, deliverers or artisans permanently travelling. Indeed, SMEs cannot afford the loss of a single company car among the few that they lease. Lessors know it and developed telematics to provide security. It is worth noting that some European SMEs see in telematics an opportunity to share their employees’ good driving behaviours through collected data with their car insurers. This transparency logic enables them to lower their insurance premiums, thus to lower again their overall mobility costs.
Ask for advice!
Long-term car lease is the outcome of a fast but thorough process to determine which cars, like model and configuration, can help companies and their employees to move faster and cheaper. For instance, business cars that travel less than 20.000 km per year can opt for a gas-powered car, as it is a matter of use versus price and environmental impact. On the opposite, a SME’s vehicle is not expected to leave the city, choosing an electric configuration may be the best option.
Like in every business areas, vehicles leasing and fleet management requires experts to be well conducted. Specialized in the full service leasing and working closely with the CVO, Arval takes all CVO researches work into account to offer the best suited mobility solutions to their clients.
COMMON DEMANDS AND DISCREPANCIES OVER EUROPEAN SMEs
The Corporate Vehicle Observatory surveyed Small and Medium-sized Enterprises from Belgium, Netherlands, France, the United Kingdom, Spain and Italy. All of them employ less than 10 employees and use at least one corporate vehicle. They are adequately split between the construction, industry, services and trade sectors.
European SME’s mobility needs share some common features.
However, the advantages that European SMEs praise FSL for are diverse.
(2) Corporate Vehicle Observatory - SME 2017 Barometer