A surprisingly high number of truck users struggle to make a clear distinction between contract hire, hire purchase and lease hire agreements and, as a result, fail to get the most economically beneficial terms for their business, says John Maguire of Flexi Warehouse Systems – the intralogistics projects division of Narrow Aisle Ltd
Although the majority of forklift trucks entering the UK market are acquired using some form of payment agreement like contract hire, hire purchase or lease purchase, what differentiates these deals remains something of a grey area among lift truck users and specifiers.
How then does the busy manager identify between the various funding methods available and decide which best suits his company’s needs?
Traditional Hire Purchase agreements are perhaps the most clear-cut to define. The price of the truck is spread across a fixed period. An initial deposit is followed by equal payments – usually monthly – and the truck remains the property of the finance company until the last installment is made. Ownership then passes to the buyer. All servicing and maintenance upkeep of the equipment during the period of the agreement is the responsibility of the customer.
Where Finance Leases are concerned, the customer pays for the use of the truck over a fixed term – most commonly five years, although any term between three and seven years may be more appropriate. A third party usually the OEM or authorized distributor undertakes to guarantee an end of lease contract residual value. At the end of the lease period the user can choose from one of two options: send the truck back to the lessee who will call in the residual value guarantee from the supplier; or renegotiate an extended lease for the equipment – usually at a lower or ‘peppercorn’ rental from the truck supplier who then owns the equipment.
The major leasing banks providing funding in this country say that the most commonly used finance option for forklift trucks in the UK is an Operating Lease with Repair and Maintenance – otherwise known as Contract Hire. Like the straightforward Operating Lease scheme, a residual value is set and guaranteed by a third party supplier and monthly repayments are calculated on the initial full cost of the equipment less anticipated residual value of the forklift. Then, with Contract Hire a fixed monthly Full Maintenance Contract (FMC) amount is added to cover the cost of maintenance during the contract term. This structure allows the agreement to be treated as an operating lease for tax and audit purposes.
With any agreement it is essential to check what is and isn’t included in the contract and it is often more important to consider the things that have been left out of the deal as much as the items that have been included.
Ask your supplier about limits to the number of hours of truck usage allowed before penalty charges apply. Consider if it would be cost effective for replacement tyres to be included in the package. Provision of diesel or LPG fuel is almost always excluded, with electric trucks becoming more popular. What happens if the battery fails? Is the warranty the responsibility of the truck provider or the battery manufacturer? Does the battery warranty cover the whole length of the lease agreement? Will your supplier provide a replacement truck in the event that yours brakes down? If the contract doesn’t specifically mention a replacement the chances are that you won’t get one. Most MHE “Contract Hire” FMC agreements do cover for breakdowns and wear and tear repairs on the whole truck. Often MHE “Contract Hire” agreements do not cover replacement tyres, worn underside of forks, operator abuse and accident damage repairs. Does ‘maintenance’ mean all repairs caused by wear and tear?
Of course, finally it is worth checking what the supplier’s policy on truck return conditions at the end of the contract. If there is no mention of “fair wear and tear” then you may be obliged to undertake some refurbishment of paintwork, operator’s cabin and other components at your cost. The financing policy for forklift trucks – and other capital equipment – should be prominent in the minds of directors and senior management. And yet a surprisingly high number of truck users struggle to make a clear distinction between contract hire, hire purchase and lease hire agreements and, as a result, fail to get the most economically beneficial terms for their business or worse an inappropriate agreement that can be very costly to manage over the contract period.
Flexi Warehouse Systems offers a range finance packages tailored to suit a client’s needs, including making changes over time that reflect the changing business environment.
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