There are a number of different ways that you can fund the vehicles in your fleet and you can find a guide to each of them here, and this one focuses on the outright purchase of vehicles for your fleet.
What is Outright Purchase?
Also known as direct purchase, outright purchase is when you buy a vehicle, paying the full amount upfront.
There are a number of benefits and potential drawbacks that you need to consider when deciding if outright purchase is the right choice for your business fleet. We’ve explored these all below to help you make an informed decision.
How Does an Outright Purchase Work?
With an outright purchase you will choose the vehicle you want, including the spec and trim level, any additional features you want and the colour of it then once the vehicle is available you'll need to pay the full price up front and then have the vehicle delivered to you.
Benefits of Outright Purchase Fleet Vehicles
We know that owning the vehicles in your fleet can be beneficial for a number of reasons, including the fact that it shows as an asset on the business’ balance sheet.
As it shows as an asset on the balance sheet you’ll also benefit from capital allowance on the vehicle, which you wouldn’t through other funding methods.
With an outright purchase the DVLA and HMRC have your business listed as the registered owner and keeper of the vehicle.
As the owner of the vehicle your business can make any changes to it that you need without worrying about having to reverse them at the end of the vehicle’s lifetime. This includes any signage, vehicle modifications and repairs.
You will also be able to use the vehicle without limitations, which you will have with some of the other funding options. For example, there will be no contractual mileage you need to stay beneath or restriction on the type of journey or use for the vehicle.
If you have a recently established business with little financial history then there will be limited methods of fleet funding available for the business. This is because like most finance providers companies offering lease and hire vehicles like to know that your business is solvent and stable before allowing you to use an asset that they own.
Considerations with Outright Purchase Fleet Vehicles
Though there are many benefits to owning vehicles in your fleet outright, there are aspects of this you’ll need to consider carefully to ensure it’s the right choice for you.
The first is that if you opt for an outright purchase you will have a large upfront cost, and this can negatively affect your cashflow, especially if you are purchasing multiple vehicles in a short amount of time. Depending on the capital your business has this may also involve taking out a loan in order to cover the cost which will then need monthly repayments that have accrued interest.
This capital will also be tied up in the vehicle for the duration of the vehicle’s life with the business, which means that this money is not available to be invested elsewhere.
Unless you decide to use a third-party fleet management company like Wessex Fleet, then you will need internal resources to manage the vehicles you own. This will include managing the drivers and any questions they have as well as the vehicle maintenance, servicing, MOTs, tax, insurance and anything else that might crop up.
As the vehicle ages, maintenance costs and any necessary repairs will usually increase, which is a continued draw on the business’ finances.
Vehicles are a depreciating asset and depending on how long you will need the vehicle for and the initial purchase price this can mean a significant drop between the amount that the business purchased the vehicle for and the resale value of it. The used car market can fluctuate massively and this trend is expected to continue with the ongoing new vehicle supply pipeline issues due to Covid delays, and the UK market’s gradual shift to EV models.
As the asset value fluctuates this makes it difficult to estimate for the books and could cause an accounting loss if it doesn’t meet the expected resale value. Until the vehicle is sold it is difficult to produce accurate cash flow and budget forecasts.
Unless it can be shown that the vehicle will never be used for personal use by your drivers then you will not be able to recover VAT on an outright purchase, like you can with other funding methods.
Outright Purchase vs Contract Purchase
Both outright purchase and contract purchase give your business ownership of the vehicle but the way in which you pay is different. Contract purchase allows you to spread the cost of the vehicle over a number of years rather than paying one large amount upfront.
The main benefit of a contract purchase vs outright purchase is that as mentioned the cost is spread over a period of time rather than one upfront payment as it is with an outright purchase. This gives you the benefit of fixed monthly payments that can be budgeted for rather than one large payment, though there may be a slightly larger initial or balloon payment.
They both have the pros and cons of owning the vehicle however there are some differences you should be aware of.
Outright purchase puts the vehicle as an asset the business owns straight away, whereas you will not own the vehicle until the last payment has been made with a contract purchase, though it will still show as an asset on your balance sheet.
Is Leasing Better than an Outright Purchase?
The answer to this will depend on your company's needs and how this relates to the vehicles in your fleet.
Leasing is a great choice if you want to regularly update your fleet to the latest models, as you won't need to worry about buying and selling instead changing the vehicles as their contracts expire. Additionally, it allows you the flexibility to choose the vehicle model spec and contract terms on an individual basis, so you can customise them to the individual driver.
If you are wanting the vehicle to show on the company's assets then leasing might not be the best choice for you as this will not happen with a leased car.
You'll also want to consider that when you lease a car you'll agree to a mileage limit and return condition of the vehicle and you may receive additional charges if you do not meet these conditions.
If you'd like to discuss your fleet needs and how you source vehicles then we are always happy to help.
Is Outright Purchase Right for My Business?
Again, the answer to this will entirely depend on your business and may even vary between departments and individual vehicles themselves. You might not want a fleet made up of entirely one type of vehicle funding and instead choose a mixed funding alternative in order to get the best options for your business.
How Wessex Fleet Can Help Your Business
We recommend regularly reviewing your fleet procurement processes to ensure you are choosing the best option for you. If you are able to we advise considering the funding method for each vehicle you source as different methods may be best for different vehicle uses or at a particular time in the business’ journey.
At Wessex Fleet we ensure we tailor funding reviews to each of our clients depending on their needs but as a minimum we review it annually as well as reviewing the overall fleet policies in order to make sure your fleet meets your needs.