Impact Partner Content / Absa
A funeral director’s fleet is one of the drawcards that serves as a key marketing tool. The fast-paced trend-driven industry competes on the wheels that a funeral home owns. An ongoing debate lurks for the funeral director as to which ownership structure best serves their needs – to own or to lease.
Optimal planning of the finance arrangement must be evaluated, and the right leverage cannot be overstated. The Insurance Act of 2017 provides guidance on how the long-term insurance industry must handle premiums collected from members. A funeral director’s 30% of premium income can be used for operational expenses. How the funeral director splits the income received within the business on the operational expense determines operational efficiency and business sustainability in the long term. The intention should be matching the commitment with the revenue generated per year, so that the payments are easily manageable without any cashflow mismatch.
Lease finance and hire purchase are the options for financing the assets that funeral directors must choose from. Traditionally, the majority of funeral directors prefer a hire purchase arrangement where they will own the asset at the end of the last instalment. It is important to highlight the key differentiators of a lease versus a hire purchase finance arrangement. When deciding between leasing an asset or considering a hire purchase as a means of obtaining the item, what does a funeral director need to know?
Key differentiators
Purchase option
The main distinction between leasing versus hire purchase agreements is that, at the end of hire purchase contracts, the customer is the legal owner of the asset. On the other hand, at the end of a lease agreement, the ownership of the asset remains with the lessor (also known as the funder/ the bank).
A hire purchase is a financing solution suitable for businesses wanting to purchase assets without paying the full value immediately. The customer pays an initial deposit, with the remainder of the balance and interest paid over a period. After payment of the last instalment, ownership of the asset transfers to the customer.
Depreciation
The leased asset is capitalised in the accounting records of the lessee, who can claim an expense for depreciation. Depreciation is claimed by the purchaser in a hire purchase arrangement.
VAT payment
With a hire purchase, the full VAT is payable on the asset on day one. The funeral director must make an important cashflow consideration, particularly when a company is exempt from VAT. In a finance lease, VAT cannot be recovered, and the full amount will be capitalised for accounting purposes. In an instance where the VAT has been claimed because the financial lease relates, it is necessary to reduce the lease payments paid to the extent that it includes the VAT that has already been recovered.
When the term agreed on under the financial lease terminates, there will be a further VAT consequence depending on what is done with the assets. Where the assets are retained by the lessor and disposed of by the lessor to a third party, VAT will be charged on the price charged by the lessor, i.e. a bank.
Period
In a hire purchase, the period can range between 48 to 72 months, depending on the purchaser’s preference, whereas in a finance lease, the term is shorter and will range between 36 to 60 months. The shorter lease period caters for flexibility where new models of the vehicle become available, the funeral director should be able to change without the hassles of long-term contracts.
Leasing offers businesses the ultimate flexibility to pick and choose their assets more readily with the budget at their disposal. The funeral industry is a trend-driven business, therefore, the business thrives on agility. Essentially, leasing allows you to use the asset while it is forecast to be useful, to pay for the asset as the benefits of its use are realised, and to plan for its return and replacement without concern over disposal issues. Funeral directors often sit with non-income generating assets that they struggle to dispose of when the vehicles are no longer attractive and operationally functional.
Leasing is often a great business strategy for business that relies on the operational soundness of a well-maintained fleet. Let’s look at the advantages and disadvantages of a finance lease through the lenses of a funeral director:
Which Absa products and services are available for funeral directors?
1. Full maintenance leases
The Full Maintenance Lease is a comprehensive full-suite service where, for a monthly rental, you
enjoy the use of vehicles that we source and purchase for your use. We carry the residual value risk
on all vehicles and dispose of them at the end of the contract. We also bear the costs of maintenance.
2. Islamic full maintenance leases
The Islamic full maintenance lease provides finance with a risk-free/guaranteed residual value and
with a risk-free/guaranteed maintenance plan built into the monthly payment. We constantly monitor
your fleet and work with you to keep your rentals in line with vehicle use. At the end of the contract,
you simply return the vehicle.
3. Operating rentals
This is where you enjoy the use of the vehicle for a monthly rental and pay the actual maintenance
expenses incurred. Our technical support and the close management of all maintenance invoices will
ensure that all costs are duly authorised, and unnecessary expenses are avoided. At the end of the
contract, you simply return the vehicle and pay for any extra kilometres that you have travelled.
4. Islamic operating rentals with managed maintenance
The Islamic operating rental with managed maintenance provides vehicle finance with a risk-free/guaranteed residual value, coupled with an outsourced maintenance authorisation and payment process for all vehicle repairs and services, built into the monthly payment.
The products and services offered by Absa Vehicle Management Solutions are geared to service the funeral director who considers leasing. Crucial value-added services geared to support the funeral business include:
Fuel management;
Insurance and accident management;
Roadside mechanical assistance;
Tracking and recovery systems;
Fines and licences;
Open-road tolling; and
Driver behaviour management.
To find out more about the funeral industry and available financing solutions, contact Abigail Makhubele on Abigail.makhubele@absa.africa, visit www.absa.co.za, call Absa Vehicle Management Solutions on 0861 600 800, or email franchise@absa.co.za
Absa is an Authorized Financial Services Provider and a Registered Credit Provider NCRCP7
