Renting vs. Buying Cars for SME’s

If one were to do a weather report on the South African economic climate it would read: “overcast with a 50% chance of rain”. This is due mainly to the political and labour unrest, high unemployment and an escalating education crisis. Although the public and private sector’s drives to upturn this economic slump are centered on the job creation and entrepreneurial participation; the answer lies on small to medium businesses to spearhead this change… rapidly.

SME’s have always had a short financial and operational horizon, hence they feel the pinch of rising prices a lot more than the bigger firms – the longer the horizon, the less price sensitive a business. This means the current climate has shifted the SME business horizon even closer making business even more volatile. They have to put greater emphasis on short-term tactical business processes, rather than more long-term strategic valuations. Immediately accessing capital, increasing profitability, expanding and managing assets in the short-term take priority over the uncertainty of a turbulent future. 

Given this shift in prospect, small business owners are being forced to think differently about asset management. One such question, amongst many others, is: Should the business rent or buy its vehicles?

If you’re a company whose core operations don’t require vehicles, your first inclination may be to dismiss the question, as it supposedly does not apply to you. I’d be cautious to throw it out to quickly, because whether it is 1 or 6 cars that your business needs, whether or not to manage the vehicle is a decision you’ll be forced to make regardless. It is the situation of limited resources in both human and financial assets and that of time which are crucial for succeeding in business. SME’s should be concentrating these assets for sweating towards core business in order to gain the largest impact.

In response to this conundrum faced by SMEs, we think there is value in renting your business vehicles, rather than buying them… and here’s why.

Scenario A: Assume you’re a small business owner who wants to buy a Polo Vivo or similar on a 60-month finance agreement with a bank. The general vehicle finance agreement is as follows:

 

Finance Item

Rand Value / Description
Monthly Instalments R3 500,00
Monthly Insurance R1 000,00
Initial Outlay (Deposit) R20 000,00
Fleet Management Owner’s responsibility
Long-Term Finance Risk Locked into a 60-month finance agreement, difficult to switch cars when business needs change
Insurance Excess R5 000,00
Depreciation R34 182,40 1st year

 

Scenario B: Assume you’re a small business owner who wants to use a Polo Vivo or similar on a long-term basis. The vehicle rental agreement is as follows:

Rental Item Rand Value /Description
Monthly Rental Payments R6000*
Insurance Waivers Included in Rental
Initial Outlay (Deposit) R9465*
Fleet Management included in Rental  Included in rental

    • 24/7 Roadside Assistance
    • Car maintenance and repairs
    • Car tracking and loss prevention
    • Replacement vehicle
Short-Term Finance Risk Easier to switch cars as and when your business needs change.
Accident Liability R3400*
Depreciation Rental company carries depreciation expense

Car rental is often considered the more expensive and irrational option, and here are a few of the stronger reasons for that argument;

  • Lower monthly expense (R3500 > R6000)
  • Vehicle ownership, and
  • A completion of payments.

In the case of SME’s and the current economic climate, it is worthwhile to concentrate and observe this comparison over a period of 1 year.

A: Finance Agreement 12 month costs (excl. depreciation)

Monthly Instalments (R3500 x 11)                R38 500,00

Insurance (R1000 x 12)                                     R12 000,00

Deposit                                                                    R20 000,00

Total                                                                         R70 500,00

 

B: Renting the car for 12 Months
Rental (R6000 x 12)                                         R72 000,00
*
figures based on rental with Pace

 Renting vs Buying Cars for SME's

Over the first year, the difference between renting and finance is just R1 500 in favour of finance. However, during the course of the year, renting is less cash heavy than financing. This is due to the large deposit payable upfront for vehicle finance.

Then, there is the factor of acquiring that finance from a bank. Financial institutions require security for their loans and a small-to-medium sized business needs a lot of loans in order for it to operate and then grow and it has very little as security. Thus, acquiring finance from banks is also a challenge and using R200K of that buying a car does not make sense when the facility can be directed to buying more stock or marketing the product.

Moreover is the peace of mind that your business will always be able to get where it needs to be because vehicles will be maintained – financed cars get old and more unreliable with time while rental cars remain fresh and up-to-date. Renting your company vehicles is an affordable outsourcing of vehicle management and maintenance.

With SME’s tackling progress on a year-to-year basis or every six months, the flexibility of a rental car is a better fit. The economy can change so much within the next 5 years that a B-segment hatchback needs of today could turn into a need for a panelvan tomorrow and, if it doesn’t work out you can just return your rental and walk away.