Whilst there are many ways to fund a telematics system, the recession has highlighted an increasing polarisation into two broad camps. Sharon Clancy examines the underlying issues

The current economic situation has focused attention how businesses should finance telematics and vehicle tracking solutions.

There are several financial options. You can buy the telematics equipment and pay separately for the SIM communications card and support services. You can buy the equipment and then bundle the SIM card and services together in a single contract. You can lease both the equipment and services on, typically, a three- or five-year contract. Or you can opt for a pay-as-you-go short-term deal.

If you go down the leasing route, you also need to make another selection. Either the tracking company itself will arrange the up-front finance and recoup it from the customer (i.e. you) over the period of the contract, or you can arrange third-party finance yourself through a bank or specialist leasing company.

 

PAYG in vehicle tracking is mirroring developments in the mobile phone sector, where many users have switched from monthly contracts to a PAYG model. Some telematics systems suppliers are concerned that this switch will intensify the focus on price rather than quality of service, and that cheap prices mean users will fail to appreciate the value that tracking technology can bring to the business.

David Isom, managing director of tracking company V-Sol, makes the point that few businesses would issue pay-as-you-go phones for their staff. 'Of course every company wants to run more efficiently and become more profitable, but while price is a factor in any decision, other factors such as reliability, accuracy and depth of reports should be far more influential in ensuring a solution that has a positive impacts on your business.

'If the data your tracking technology produces proves to be inaccurate, or you can't generate the information you need, any expenditure will be wasted.'

Short-term gain, long-term pain

Companies arguing against PAYG include Aeromark, Navman Wireless, TomTom WORK and V-Sol, who point out that while PAYG may seem to be an attractive proposition from the customer's perspective in terms of flexibility, there are potential risks for both the customer and the supplier.

Jeremy Gould, UK sales director for TomTom WORK, points out that in a PAYG business model, cash flow is diverted from investment in new product and services into funding the cost of the hardware. 'The customer needs to weigh up the short-term gain against the potential pain. What happens when the supplier is no longer able to sustain the model, or even worse, can no longer provide the basic service at all as it has run out of money?'

Ironically, some proponents of pay-as-you-go systems advance a remarkably similar argument for their own approach, maintaining that there can be risks for the end user if the supplier goes bust, but the lease payments still have to be made.

PAYG champions

Certainly PAYG services are gaining momentum. Earlier this year, Quartix, one of the UK's leading tracking companies, introduced its first PAYG system. By June, it was reporting that 50 per cent of its new business was already on PAYG.

'PAYG suits the mature tracking market,' says managing director Andy Walters. 'The benefits of PAYG to the customer are unmistakable; they have no large capital outflow, and can more or less terminate if they have business cash flow issues, or are unhappy with the service or the benefits that were envisaged.'

He adds: 'A five-year lease contract through a third-party finance house or bank provides a large of amount of up-front cash for the telematics supplier and a five-year financial obligation for the customer, even if the tracking supplier closes down. Switching to a PAYG model moves the financial risk moves from the customer to the provider.'

Walters's advice is simple. Vehicle operators, he says, should not sign a lease agreement that provides immediate payment to the supplier for service and support charges as well as the cost of the equipment.

Walters admits that paying a higher monthly service fee over long periods can prove more expensive for customers, and says the challenge for providers is to work out how to price the service. 'There is a danger that the industry will mis-price it, putting more pressure on an already fragile market.'

Quartix offers three PAYG bands, starting at £19.50 and rising to £29.50 for a full reporting system that includes routing planning and optimisation and dashboard-style KPIs.

Trackm8 has introduced a flexible rolling monthly contract option for its new Swift fleet management packages, designed to offer more flexibility than a typical three-year or five-year lease. There is an initial set-up charge and then a monthly service fee, payable by direct debit. The new packages consist of Fleet Classic, Fleet Advanced and Fleet Premier, and includes hardware and installation.

Isotrak has offered a PAYG model for several years now. 'Having PAYG helps when explaining the cost versus benefit analysis to potential customers,' says sales and marketing director Craig Sears-Black. 'It needs to be flexible, so that customers can upgrade as and when their business needs changes, and also downsize.'

Finance is available

One reason PAYG is gaining momentum is the reported reluctance of lenders to provide the finance for leasing equipment, but Tony Neill, executive vice president at Navman Wireless, refutes this. 'Fleet managers are being told that they can't get lease finance because of the lenders' new attitude to the risk surrounding smaller businesses. As a result, they are often being urged down more expensive routes.'

Neill is sceptical. 'This is pulling the wool over customers' eyes,' he says. He believes it is more likely that the lenders' decisions will be influenced by the lack of confidence that the bank has with the tracking supplier, rather than by the customer's credit score.

'We aren't denying that all financial institutions are tightening their belts and scrutinising risk much more closely, but our records show that over 90 per cent of our customers are still being accepted by the leasing companies.'

Neill accepts that other tracking suppliers may well have a totally different credit history and relationship with banks, but says fleet managers should not assume that if they are turned down for leasing finance by one finance house, this will be the case across the board, or that they have to go for the more expensive rental option.

'We want to get the message out that prospective customers with good financial standing can still get the lease finance they need to invest in this valuable technology.'

This view has been echoed by Shire Leasing, the UK's largest independent funding house. Lenders have taken a more prudent approach to their risk assessment, says John Flounders, Shire's leasing sales director, and their focus is now on the supplier as much as the customer.

'Those choosing to invest in systems supplied by the most financially robust vehicle tracking companies should have little difficulty in acquiring lease finance, assuming they themselves are creditworthy.'