There is a well-known saying that when America sneezes, the world catches a cold and markets around the globe are now suffering from one of the worst bouts of financial flu in decades.

Banks are still writing off billions of pounds as a result of the financial turmoil in the United States, mainly caused by sub-prime mortgage losses.

The fever has spread to the UK, where the government has had to inject tens of billions of pounds into the financial markets to persuade them to begin lending more freely again.

Even the banks don't want to lend to each other and when that happens you know the economy is in trouble.

This is hardly an atmosphere that inspires confidence among businesses and may prompt a financial health check among many as they consider whether they are robust enough to cope with a downturn in customer demand.

But a potential cure for financial problems, now or in the future, is often overlooked as companies do not take into account the assets contained in their vehicle fleet.

Company vehicles represent a cost that is only slightly below salary and buildings for most businesses and they can tie up huge quantities of business cash.

For purchased fleets, a company's money is tied up in a depreciating asset that is worth less with every mile driven and swallows up even more funds if unexpected repairs are required or residual values suddenly fall.

Time and attention has to be invested in both procurement and disposal, but the prices achieved by an in-house operation will rarely beat the performance of the specialist expertise contained in the larger leasing or vehicle rental businesses who are continuously buying and selling thousands of vehicles each year

It is estimated that outright purchase or finance leasing is the chosen funding option for about 90% of commercial vehicles, while the majority of car fleet operators now consider contract hire the best option, as they pay a fixed monthly sum for their vehicle for a fixed period of time.

The supplying company takes all the risk on the future value of the used vehicle market and will normally manage the ongoing servicing for an inclusive monthly fee, further aiding budgeted fleet costs.

But the ‘Achilles heel' of contract hire is the commitment involved, as most agreements will range from two to four years for a standard fleet replacement cycle.

There is also a sting in the tail, if companies hand vehicles back early. So-called early termination charges are designed to recoup the early depreciation on the vehicle, which would have otherwise been factored into the lease over its full duration.

This can be a major liability for a company looking to save money through downsizing in the face of slowing business demand.

A more flexible approach for long-term business health may be called for, which has led to some forward-thinking organisations focusing on vehicle ‘usership' and not ownership by turning to rental as the preferred method for acquiring vehicles.

Traditionally, rental is viewed as an option to fulfil a temporary vehicle shortage or meet periods of peak demand. However, the development of a range of products such as contract-free, flexible rental - often for many months - with no penalty or early termination charges, combined with the more recent introduction of concepts such as sale and rentback, is broadening the appeal for rental to an increasing range of organisations, both large and small.

Under sale and rentback, companies with an existing fleet can benefit from an immediate cash injection into their business. For example, a company like Northgate buys the old fleet, thus removing expensive depreciating assets from a company's balance sheet and then rents back to the customer a fleet of new vehicles.

This approach can improve a company's gearing ratio - the ratio of debt to equity - and enhance the bottom line, but it is also a more tax-efficient approach too, including on VAT, as the supplier is using the vehicle for 100% business use and can therefore maximise its reclaim to create a more competitive offering for customers.

With the money traditionally tied up in vehicles returned to the client business, it can be used to fund development of core activities and, unlike other funding methods, the fleet is effectively on short-term hire, so it can be expanded or reduced without notice and with no financial penalty, making it an ideal fleet safety net for companies that need vehicles without the risks of a long-term commitment.

Not only that, but it is the supplier that carries the residual value risk and picks up the vehicle servicing bill, all for one inclusive fee.

It is worth doing the sums for your business and considering what your view is on the risks facing your sector over the next couple of years.

Long-term planning is difficult at the best of times and if you believe your business could be caught-out by an economic downturn or suffer from a shortage of funds due to banks changing their lending policies, then rental is a viable option to keep your business in good shape for the future.

Phil Moorhouse is managing director of Northgate Vehicle Hire. For more information visit www.saleandrentback.co.uk [1]