Vehicle tracking finance contracts reach the end of the road

29 February 2012

Some vehicle tracking suppliers are asking customers to raise credit finance to bolster their own cash-flow, believes Andy Walters, managing director of Quartix Ltd.

The use of asset finance for vehicle tracking systems dates from the nineties, when the tracking systems could cost £1000 or more to buy. Leasing made sense to both customers and suppliers alike, as the cost could be spread over anything up to 5 years and the tax benefits of taking it as an operating cost instead of depreciation were significant. But during the credit boom some tracking companies took this financing model a step further and included the service charges for the contract in the amount to be financed. This had the potential to double the pay-out to the tracking company – to anything up to £2000 per unit.

At Quartix we also used asset finance in the early days, but only for the value of the tracking system: we collected service charges either directly from the client, by direct debit, or through the lease company. These service charges would typically be £11 per month per vehicle, and would cover the costs of the SIM card and data transfer, reports, software services and warranty. Payment for these was only invoiced and taken as it fell due, during the course of the contract.

Vehicle tracking systems are now very affordable

For those suppliers who “bundled” the value of services into the total amount to be financed (presumably by putting a higher value on the asset), the temptation to use the cash received up-front to fund business expansion, rather than for the support of the contract itself, was too great and the consequence was that many went under when the credit crunch hit. As the flow of cash from new deals dried up they couldn’t support their customers, who were left with hefty finance commitments. In some cases the ink on the lease contract was still drying when the supplier went bust, and one company I am personally aware of was left with a £75,000 liability on a vehicle tracking contract that had only just been signed.

This should all be old news, but it’s not because it is happening again. Some vehicle tracking companies are committing customers to anything up to £1500 of payments per system on lease agreement. This represents at least six times the market value of the asset being financed, as tracking systems are now sold for £250 including installation and warranty, even by some of the companies who are promoting these lease deals.

It pays to carry out due-diligence on the vehicle tracking supplier

Many customers sign these contracts without doing any due diligence on the chosen supplier, and in most cases they don’t even read the terms of the agreement. They are often unaware of the fact that the supplier gets paid out on day one, and that they would be unable to cancel the arrangement if the supplier went bust. One could argue that they should have read the contract, but how many of us read right the way through the terms and conditions for everything we buy?

We can see all the signs of strain in the market that were evident before the first wave of failures in the industry: companies who have taken pre-payment of service charges in the way described now need fresh cash to support their existing obligations. In some cases their operating cash flows are significantly in the red and their revenues are declining. Their sales staff are under intense pressure to bring in new deals, but customers are increasingly reluctant to sign up to them. I am as convinced that there will be more failures in our industry as I was when I predicted the first wave, at the end of 2008.

Asset finance played a significant part in the development of the vehicle tracking system market, but hardware costs have dropped dramatically in the past decade and finance is no longer needed for the equipment itself. Any supplier with a solid balance sheet and confidence in its system and support should be prepared to offer vehicle tracking as a service with flexible contract terms, in exactly the same way as broadband internet and other communications service providers operate.

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