Service plans sales have grown in the retail sector and could play a useful cost control role for SMEs too. Curtis Hutchinson, editor of Motor Trader, reports.

If you outright purchase your company cars and vans and source them through your local franchised dealers then you should seriously weigh up the pros and cons of taking out service plans to cover their maintenance costs.

The sale of service plans has boomed in recent years with demand from retail customers now at unprecedented levels. It’s easy to see why. As consumers we’ve moved towards the convenience of monthly payments on all manner of items from sofas and utility bills to mobile phones, satellite television packages and now cars. According to the Finance and Leasing Association, last year 984,077 new cars were funded through point of sale dealer finance, a year-on-year increase of 10%. The bulk of these purchases were through low interest manufacturer-supported Personal Contract Purchase (PCP) schemes.

Far from being a new concept, PCPs have dramatically changed the way cars are funded with customers effectively paying for the use of the vehicle over three years and then either paying a final balloon payment, to secure ownership, or use any remaining equity to roll into another PCP-funded new car. Ford boss Andy Barratt reckons PCPs account for over 80% of the brand’s retail sales. That’s how big they are.

As a consequence of this shift towards monthly budgeting dealers are now selling more service plans than ever before and many are being sold alongside PCPs. Service plans, like PCPs, tend to be sold with low interest rates and appeal to customers as they remove the one-off financial pain normally associated with annual services.

For SMEs running outright purchased vehicles monthly budgeting is every bit as critical as it is with private owners. This might sound like a win-win for everyone but Which? magazine recently caused a bit of a stir when it suggested service plans were little more than smoke and mirrors used by overzealous dealers to fleece customers.

Its chief executive, Peter Vicary-Smith, regaling his personal car buying experience of being offered an array of add-ons from paint protection to alloy wheel insurance and “a servicing plan that will run out before I want to use it”.

It’s a curious and misinformed comment. Anyone buying a car will be aware of the need of an annual service to make sure the car is roadworthy and stays within its warranty cover. Indeed for businesses the annual service is all part of their wider duty of care obligations.

Unsurprisingly the service plan sector hit back at the Which? attack. Angela Barrow, managing director of EMaC, one of the UK’s largest suppliers of service plans, was particularly irritated. An industry stalwart Barrow has been widely credited for helping popularise service plans in the UK.

“Mr Vicary-Smith’s observations surrounding service plans are inaccurate and misleading,” she said. “Our service plans never run out and if a customer changed car their plan could be transferred or they could gain a refund. This is the same industry model that exists across our industry.

“Rather than adding to the cost of motoring, service plans invariably save consumers money and ensure vital servicing work is made affordable.”

The relevance of a service plan for SMEs has just been ratified by a Mercedes-Benz Vans initiative.

The brand has dramatically overhauled its servicing offering to businesses by rolling out a national service pricing initiative to address regional variations with a flat national labour rate and standard pricing for oil and parts.

As part of the programme it also introduced a service plan package enabling firms to cover their vans from just £8 a month for the Citan and £10 for a Sprinter.

Furthermore with many of its dealers now offering fleets out-of-hours servicing to minimise vehicle downtime, Mercedes claimed a business could save up to £261 for out-of-hours servicing over four years if they pay for six services for a Sprinter van with a service plan.

It’s a bold move and one sure to be followed by other brands keen to offer businesses the monthly budgetary control and peace of mind already afforded to retail customers.