How do car hire companies make money?

[Jam Man]

This is something that has been bothering me for some time.

I'm sure we've seen car hire companies offerign cars often worth 6 figures for hire (£100k - £200k+). But what I don't understand is after all the costs, car price, tax, insurance, maintenance, MOT etc that they can actually expect turn a substantial profit when offering the car for a couple of grand for X number of days.

How does it work??

 

[Rds discounts]

All hire company's including car hire company's will price there product so that they will make back the cost price within x amount of time. This time frame will vary depending upon the product but for example a tool hire company will buy a drill for £500 and have a weekly hire of £50 so the customer who needs the drill for a week dosent have to spend £500 and the hire company will make there money back in 10 weeks and anything after is profit (delivery and service will come from there general overheads as the price to deliver a drill will be insignificant in this business. So with a car hire company they will spend x amount and say well we want to break even in 6 months so they will factor in all associated large costs to get x and divide by 6 so they have a monthly cost and will make x amount after 3 years when the car will be sold on as it has done x amount of miles etc so basically it is a large upfront cost with good margins after the initial investment is paid back which will probably be 6 monts to 12 months

 

[Jam Man]

But the car hire can't predict how well they will be doing business. It seems to be very risky to purchase expensive assets and have to wait to see who comes in.

If they buy a car for 50k, and then add an extra 10K for insurance etc, it means they need to make around 1100 a week to BREAK EVEN, let alone profits.

Then there are cars worth £150K plus, and people don't hire out these cars every day?!

 

[Rds discounts]

Sometimes business is risky, but if your willing to drop £150k min then you shore as hell best have a solid plan.

 

[deboy]

But the car hire can't predict how well they will be doing business. It seems to be very risky to purchase expensive assets and have to wait to see who comes in.

If they buy a car for 50k, and then add an extra 10K for insurance etc, it means they need to make around 1100 a week to BREAK EVEN, let alone profits.

Then there are cars worth £150K plus, and people don't hire out these cars every day?!

It doesnt work like that.

I own and operate a vehicle finance company with a small car hire business bolted on the side.

There are many ways are car hire company operates and how they make there money. if you really want to know then just ask me and I will tell but bear in mind it will be like re-writing war and peace it will be alot of information

 

[Shane Mason]

It doesnt work like that.

I own and operate a vehicle finance company with a small car hire business bolted on the side.

There are many ways are car hire company operates and how they make there money. if you really want to know then just ask me and I will tell but bear in mind it will be like re-writing war and peace it will be alot of information

I've often thought about this too; "how do they make money", so just out of plain interest; if you're willing to provide an explanation than I'd be 'all ears' :)

 

[deboy]

ha ha ha i knew someone would ask me..

Ok ill just give you a couple of examples how it is done.

Firstly depending on the size of the car hire company depends on how the vehicles are funded.

This could be an outright purchase or it could be financed, a bit like a HP deal.

So lets take a mall sized company for instance running approx 50 cars, the likely hood of this company buying the cars outright would be very slim and they would most probably be funded using finance and on a scheme called 'Buy Back'

Now a buy back is simply when someone like me who runs a car hire business goes direct to the manufacture, lets use Ford Uk and negotiates a purchase price for lets say a focus, which would initially be discounted and in my cas I gt 27% off the price of a ford focus.

Now with my 27% discount i have a final cost of the car of say £14000. I agree to buy 30 of these a year but i want them on a buy back which means Ford UK will garuntee to buy the cars back off me at a garunteed price within a set period of time.

So now I have bought my ford focus and we have negotiated a buy back price after running the car for 6 months at £1200.

That means I have bought a ford focus for £14000 and I have a garunteed buyer and selling price of £12000 in 6 months time, so that means I have to make £2000 in hire charges to break even right ?

NO you couldnt be more wrong.

I have not used my own money to buy tis car I have financed it using funding from my bank so you need to factor in the cost of borroing on that £14000. you also need to factor in some costs of maintenace on the car which wont be very much but you still need to factor it in.

The profit on the car for 6 months could be anything as you dont always have your cars out on hire but lets say a ford focus daily rate is £25 a day. if it was out on hire for 50% of the time you will have generated a revenue of approx £4500 over a 6 month period.

So take your £14000 purchase price and take off the £2000 you will lose in depriciation as your car is only worth £1200 now and take your cost of borring off aswell and a bit of maintenence you probably come out with about £2000 profit over the 6 months.

Now you might think this is great but it only takes 1 car to be written off and all your profit is gone and so is your garunteed buy back.

Now after all that some people might think is it really worth it as it it is a big risk.

Well yes it is as there is the little thing called VRB

VRB is volume related bonus and this is a some of money paid to you by the manufacturer for buying a certain amount of cars.

As an example the VRB on a focus is approx £2500

Alot of big rental comapnies which run upwards of 5000 vehicles survive only on rebates, its very risky but if it works you make a lot of money.

Now thats just one way to do it.

Another way which is the easiest way is to lease your cars from companies who provide cars to car hire companis.

You pay these firms about £60 a week for ford focus and you rent it out for £25 a day and the difference is all yours.

I can explain alot of other ways how its done but its late and quite frankly it will take me forever.

But i hope this helps you understand it a bit better and if you have any Qs just ask ill try and answer them for you

Please excuse all the typo's my eyes are tired

John

 

[Jam Man]

Interesting, thanks for the insight. It's generated some questions!

What about insurance, is it much higher for rental cars? What sort of price for a focus?

If the car is written off, the insurance pays you out so you still have something left of that car?

What does rebate mean in this context?

What do the manufacturers get out of it, is just that they get to sell XX amount of cars in one go?

If Ford buys back the car £2-3k less than what was paid for it upfront after 6 months, it really isn't that bad. But what sort of miles would they expect, is there a set criteria laid out as to how much a car is worth given its condition after 6 months? (sometimes you can get people who hire out a car for a week, and drive up and down the country adding 2k miles instantly!)

When you give the car back, do you just buy another one and do the same again?

Do all manufacturers do this scheme, including the more expensive, Jag, RR, Bentley etc.

So it seems that getting a car from the companies which give cars to hire companies is safer, and requires less capital to start with?

 

[PJAS]

Ill keep an eye out on this. Although not exactly the same, still similar, my dad is thinking of setting up a wedding car company. At the moment he see's that he buys a car at X amount, and then takes away insurance, fuel, tax, etc. etc. costs and is left with a profit. I think theres a lot more to it than that, personally.

 

[deboy]

Interesting, thanks for the insight. It's generated some questions!

What about insurance, is it much higher for rental cars? What sort of price for a focus?

You obtain a fleet policy specicially designed for rental companies which covers your entire fleet not just one car. For 50 cars your looking around 20k if your just starting out

If the car is written off, the insurance pays you out so you still have something left of that car?

They will only pay the market value which would be less than your buy back price

What does rebate mean in this context?

Rebate is quite simple. The more you spend the more you get back. Its like a thankyou for yourbusiness payment

What do the manufacturers get out of it, is just that they get to sell XX amount of cars in one go?

Manufactures get an awfull lot out of it. They get the sale of the car and they get there product into consumers easier

If Ford buys back the car £2-3k less than what was paid for it upfront after 6 months, it really isn't that bad. But what sort of miles would they expect, is there a set criteria laid out as to how much a car is worth given its condition after 6 months? (sometimes you can get people who hire out a car for a week, and drive up and down the country adding 2k miles instantly!)

Yes there are mileage limits, most are around 16000 miles over rhe 6 months

When you give the car back, do you just buy another one and do the same again?

Yes if you want to or you can keep the car

Do all manufacturers do this scheme, including the more expensive, Jag, RR, Bentley etc.

Yes the majority of manufacturers do this scheme , but it is limited to certain models

So it seems that getting a car from the companies which give cars to hire companies is safer, and requires less capital to start with?

Yes if you are just starting out it is the best way and easiest way to get you going until your in a position to source your vehicles another way.

If you are considering going into this business then please do your homework as if you make a mistake it will be very very costly

Hope this answers your Q's

John

 

[Jam Man]

Thanks for that, John.

For the 6 month policy, can you negeotiate with the maker reagrding miles. Could you even tell them you'll the car back after a year instead of 6 months. Would they be happy giving you used cars instead of new ones? Do they mention anything on the condition of the cars on their return?

Not looking to start a rental company, don't have the capital. But I'm researching into this industry.

 

[Kingamer]

it could just be a front for other things like the huge number of car washs and mobile phones shops and car hire companies around my city there is no way they are making a profit now you can guess the rest

 

[deboy]

Thanks for that, John.

For the 6 month policy, can you negeotiate with the maker reagrding miles. Could you even tell them you'll the car back after a year instead of 6 months. Would they be happy giving you used cars instead of new ones? Do they mention anything on the condition of the cars on their return?

Not looking to start a rental company, don't have the capital. But I'm researching into this industry.

Negotiating terms with the manufacturers is always an option but you will have to carry some wieght if you want to move away from the normal terms and by that I mean you will need to commit to big volumes. eg: 000's a yr

They would never provide used cars and the return conditions are all subject to BVRLA standards link below.

http://www.bvrla.co.uk/Advice_and_Guidance/Fair_wear_and_tear_standards.aspx

John

 

[Jam Man]

So what happens if the cars are returned, with a higher mileage and damage on the car, is there a fixed price as to how much they deduct from the buy back offer?

It still leave the question as if there is a miles limit, many hire companies advertise unlimited miles. I guess they pray the car doesn't return after two weeks with an additional 3K on the clock...

Do you know of the companies that will provide you with vehicles to hire out?

 

[deboy]

So what happens if the cars are returned, with a higher mileage and damage on the car, is there a fixed price as to how much they deduct from the buy back offer?

It still leave the question as if there is a miles limit, many hire companies advertise unlimited miles. I guess they pray the car doesn't return after two weeks with an additional 3K on the clock...

Do you know of the companies that will provide you with vehicles to hire out?

If the car is returned with damge then you will be charged for its repair.

If it goes over its mileage limit you will be charge roughly 10-16 pence per mile upto the first 2000 miles over. after that the buy back deal is terminated on that particular car and you will have to keep it.

The hire companies that advertise unlimited mileage must own the cars themselves

 

[Jam Man]

The hire companies that advertise unlimited mileage must own the cars themselves

That would include quite a few, Hertz, and probably enterprise too.

 

[soheilg786]

Negotiating terms with the manufacturers is always an option but you will have to carry some wieght if you want to move away from the normal terms and by that I mean you will need to commit to big volumes. eg: 000's a yr

They would never provide used cars and the return conditions are all subject to BVRLA standards link below.

http://www.bvrla.co.uk/Advice_and_Guidance/Fair_wear_and_tear_standards.aspx

John

do you know of any lease companies that will allow you to hire out cars?

 

[Jam Man]

This is probably an extension, but how to lease car companies work?

I heard that they give you a brand new car, charge you a monthly fee, ask you to do some miles, service, MOT, tax AND insure the car...

 

[deboy]

This is probably an extension, but how to lease car companies work?

I heard that they give you a brand new car, charge you a monthly fee, ask you to do some miles, service, MOT, tax AND insure the car...

Take a look at my website it explains all about leasing and the various methods.

Www.stratavehiclesolutions.co.uk

 

[Jam Man]

Sorry about the delay. I've read all the different types of leases on your website.

Is there any type of lease where the insurance, tax and maintenance is included within the month price? I work within the NHS and they have the leasing company which can provide cars on a monthly fee and offer everything included apart from fuel, of course. You just have to meet a mileage allowance per month. But I always wondered how they make money at the end of the 3 years as they car would have depreiated and they would only have made a few thousand pounds since the average monthly cost is about £100 for a car worth about £15k or so.

What sort of contact or leasing arrangements are best for business fleets?