AGAINST a complex and difficult to read economic backdrop, vehicle leasing has a significant role to play in helping provide business mobility and accelerating the shift to electrification.
But how can businesses ensure their companies are creditworthy, to take advantage of leasing opportunities?
Madhuri Amin (pictured) is the Senior Credit Risk Officer, Lex Autolease – Lloyds Banking Group.
Here she explains how companies can take advantage of vehicle leasing by ensuring that their risk profile is fully creditworthy.
Main image: Shutterstock
The economy paints a complex picture: although there has been a slight increase in house prices recently, and the rate of inflation is slowly falling, economic growth remains sluggish. A lot of mixed messaging from the economy too; a case of optimism tinged with caution. What’s your take?
The economy remains fairly benign in terms of the credit environment. Interest rates are coming down, although they still remain at a high level compared to what consumers have been accustomed to. This continues to impact customers as they transition from lower cost mortgage fixed rate deals to higher cost ones.
And while energy prices have come down from the highs of 2023 as a result of the conflict in Ukraine, they are still impacting the cost of living, in much the same way that food prices are.
This means that in spite of easing pressures, consumers remain cautious as they are impacted by or adjust to those higher mortgage payments and household bills.
So how does business vehicle leasing fit into this picture? Is it a good idea? What’s the benefit vs buying?
Car leasing offers lower upfront cost and lower monthly payments compared with buying a car outright.
Customers can drive new cars every couple years to meet their needs, offering businesses the flexibility to increase or decrease the number of cars financed depending on business demand, rather than purchasing cars which may not be required further down the line.
The leasing term can be two to five years, so it depends on what works for the business and how the monthly payments fit into their cash flow projections. But, generally speaking, 36 months is the standard most people go for, providing certainty over a three-year period while allowing greater flexibility should the company’s requirements change.
How does vehicle leasing fit with the ESG agenda?
Newer cars provide the opportunity to reduce emissions, particularly as fleets have aged. Latest data from the SMMT shows that overall emissions decreased by 2.1% across the vehicle parc, but company car emissions plummeted by -11.5% as businesses adopted less polluting vehicles. Leasing helps the transition to lower emission new cars and zero emission cars, because of the reduced upfront cost to access these vehicles.
Lex Autolease has strong targets to support Britain’s move to a more sustainable future through leasing and other products such as salary sacrifice, which provides a tax-efficient and lower cost method for consumers to access zero emission vehicles.
Against a backdrop of some difficult trading since the pandemic, what can companies do to ensure credit acceptance for leasing business vehicles?
There are two important factors. The first is that businesses need to be creditworthy. This means having healthy accounts with no adverse indicators on their credit files – such as missed payments, outstanding invoices, and so on.
Businesses should also be mindful of how leveraged they are. It’s no surprise that from a responsible lending perspective, the more leveraged your businesses, you’re less likely to be accepted for further credit.
The second factor is really making sure your accounts are up to date and present a full picture of your business at Companies House. The decisions we make as a lender are only as good as the data we have. So if you can provide a full picture of your business then we’re able to make a more informed, quicker decision with confidence in the health of your business.
This may sound like basic stuff, but we see lots of examples where businesses don’t provide this. Being transparent upfront is the way forward and avoids being asked for information later which will delay any credit decision.
What are the key risk indicators that you look for?
Madhuri advises the following:
- Adverse business and director indicators – such as an inability to pay, missed payments with other lenders and so on – all impact credit ratings. Dealing with those is important but doesn’t improve your credit rating immediately – it can take a while to demonstrate your ability to pay and that you are now creditworthy. It’s about building up a positive picture of your company’s creditworthiness.
- For sole trader applicants, where typically there are lighter business credit files, we also look at personal credit history. Again, we would look for a clean credit file with positive indicators of handling credit well eg, payment history on credit cards, mortgages and loans. You can review your credit history at the Credit Ratings Agencies and see the steps required to improve it.
Overall, Lex Autolease is making the decision-making process more efficient so we can speed up our credit decisions. That way, customers can get in the vehicles they want more quickly.
We have talked about business leasing so far, but many of the same pressures – cost of living in particular – are affecting consumers. Does this pressure on incomes mean leasing is out of reach for consumers?
We’ve seen signs of wage growth which helps, but the pressure remains on the cost of living.
Funders remain open to lending, it’s more about consumer behaviour. Consumers remain cautious about committing to additional higher expenditure and are searching for cheaper options. These include nearly new cars, for example, although more recently we are seeing greater vehicle discounts coming into the market, which has sparked consumer interest once more.
This cautious customer behaviour may continue for some time, until people have adjusted to increased costs. We’ll need to wait and see how things normalise over time.
For the use of brokers, fleet managers and other professionals only. Lex Autolease Limited. Registered office: 25 Gresham Street, London EC2V 7HN. Registered Number: 1090741 England and Wales. Lex Autolease Limited is authorised and regulated by the Financial Conduct Authority for credit related regulated and insurance distribution activities.
Information correct as of October 2024.
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Ralph Morton is the leading journalist in the leasing broker sector and editor of Broker News, the website which provides information and news for BVRLA-registered leasing brokers. He also writes extensively on the fleet and leasing market in both the UK and Europe.
