Making the Most of Credit
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Page 79
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There are Various Methods of Raising Loans, and Different Schemes for Financing a Number of Expenses Met by Hauliers
LAST WEEK I described the revolution which had taken place in the banking world in the past year as a result of the association of the clearing banks and the finance houses. Following the removal of restrictions on advances. there has been a great increase in the supply and demand of credit facilities.
Transport operators have been traditional users of this service, and over 80 per cent, of all hire-purchase transactions relate to either private or commercial vehicles. There has undoubtedly been much criticism in the past of this method of acquiring commercial vehicles. It is claimed that it facilitates entry into the haulage industry to such an extent as to cause an unreasonable amount of competition.
Moreover, where the new entrant has not gone fully into the costs of operation before entering into a hire-purchase agreement for a lorry, he may be forced to accept traffic at low rates to meet subsequent monthly instalments. In fairness, however, this is really a criticism of the abuse, rather than the use of credit-finance facilities. In support of this service, it can equally be claimed that many well established operators first started in this manner, even though at a later stage of development they may have been able to finance their own fleet expansion.
Funds From a Bank
There are now several methods of financing the purchase of vehicles. One of the main methods, of course, is to obtain funds from a bank. Ordinarily, this would be a legitimate purpose for a bank advance, though the proposition would be assessed in accordance with the usual principles of bank lending—the financial position of the borrower, the state of his business, balance-sheet figures and so on. Of the various ways of financing now available, borrowing from a bank would probably prove cheapest, provided that the bank was satisfied with the proposition. Briefly, the greater the assurance or actual security, the lower the charge.
In addition to the ordinary bank advance, the newly introduced personal-loan scheme might also apply. Such loans, as the name implies, are primarily intended for individual needs and when granted for the purchase of vehicles are nearly always limited to private cars. As the scheme is also available for the financing of small businesses, such as shops, it is possible that light delivery vans could be bought under a personal loan.
The difficulty of having to meet a heavy lump sum payment, which for small businesses could be substantial, are then removed. In contrast with the normal type of bank advance, the personal-loan scheme is based primarily on the individual integrity of the customer and not necessarily upon the material security which he can provide.
Because the manager of a local bank has the authority to a42
deal with the application for a personal loan, the attendant formalities of obtaining credit are reduced to a minimum. Arrangements for repayment of the loan can be made by instalments over a period of 6, 12, 18 or 24 months, whilst the total amount to be paid in charges is known from the outset. The interest charge is calculated on the amount of loan taken at the published annual rate.
Although this may alter from time to time according to changes in the general pattern of interest rates, the rate on an existing personal loan would not be affected. The current rate is 5 per cent. As an example, if it were required to purchase a small delivery van costing £500 and to repay it
over two years, the in erest would amount to £50. Having received £500 cash, repayment would be made by 24 equal monthly instalments of £22 18s. 4d., making £550 in all.
In addition to the certainty regarding the amount and period of repayment, the service can include cover in the event of the death of the borrower so that no liability for repayment of any further instalment falls on the estate. Where the operator of the vehicle already has a banking account, instalments can be paid by a standing order, so relieving the borrower of having to remember and make arrangements to pay each instalment when due. A further advantage is that interest certificates can be provided for the purpose of tax relief.
As distinct from any form of bank loan, the hire-purchase (Continued on page 227)
companies now provide a wide range of facilities of ist to operators. In addition to the purchase of vehicles, gcments can be made to spread the cost of garage ment and plant, major overhauls and conversions, tyres, il licence duty and insurance premiums.
!lowing recent adjustments of bank and other interest there has been a corresponding re-assessment of the of some hire-purchase scales. One simple form of :e enabling operators to obtain new vehicles permits a it of 10 per cent. of the cost price, provided that they if specified manufacture, falling mainly in the heavy t. Repayments of the balance may be spread over Js of up to 36 months. A flat rate of 5-per-cent. interest trged per annum, although to suit individual requirements il terms can be arranged where the credit is justified. the accompanying table examples are given of this scheme the cash prices are £1,000, £1,500, £2,500 or £4,500. In case it is assumed that the minimum deposit of lu per is paid at the outset, and the standard flat rate interest per cent, per annum is charged on the balance. The I monthly instalments remaining to be met are shown le three periods of one, twO or three years.
rates and charges as shown in the table apply basically lividual vehicles, but where substantial fleet replacements ivolved, and in other special cases, lower rates may he d, naturally dependent upon the nstances of individual proposers. ;arding the loans made to meet ;1 licence duty payments, 90 per can be obtained in advance and I, plus charges, over the 11 ensuing is. By using this method, there is ing of approximately 3i per cent.
ired with payment of duty at the normal quarterly rates. is for a goods vehicle with an unladen weight of 3 tons, annual rate of duty is £35. Where arrangements lade direct with the taxation office to pay the duty irly, the appropriate amount is £9 12s. 6d. and in a full therefore, £38 10s, will be paid, or £3 10s. more than the I rate.
lendent upon the actual terms of individual agreements. nount of total duty payable could be reduced to around )s. by arranging payments to be made monthly through i-purchase scheme. The benefits of extended payment still, of course, be retained and there may also he a saving through the avoidance of the loss of a few days' ng which could occur when taking out licences quarterly y day other than the first of a specified three-monthly
Effecting Economies le further examples of the variation in the amount of ; duty payable over one year emphasize the opportunity icting economies. The annual duty payable, on a small ith an unladen weight of one ton is £15 for the full year, ; 10s. in four quarterly payments. Similarly the duty on :ht-wheeler with an unladen weight of 71 tons would pond ingly be either £120 or £132.
far, provision of credit finance has been considered e to the purchase of specific vehicles, equipment or other ratively durable products. Occasion' can arise, howwhen existing operators may need additional capital a period of expansion although it cannot' he allocated particular purchase. The additional finance required by company might he too small to justify a public issue; the length of time, as well as the purpose for which it. be required, would eliminate the possibility of negotiating -term loan through a bank. Schemes are available to meet such occasions and the amount loaned may be up to £50,000, whilst the period of repayment can be much longer than for the normal hirepurchase agreement. Obviously, where such amounts and periods are involved. the preliminary investigation cannot be so simple as with a short-term loan, and valuation and legal expenses can be incurred.
Hauliers making application for this type of loan will have to produce figures to support a successful record of operation, and the general intention for which the loan would be granted would be to enable him to handle more traffic more efficiently, either by the acquisition of new depots or in other ways.
There can be no standard rate for this type of loan as every agreement is an individual transaction. In keeping with the longer period of the loan, the instalments may be paid yearly, instead of monthly as with short-term loans. Whilst the instalments may be of equal amounts, this may not necessarily bc so in every case, Earlier, attention had been drawn to criticism of the application of hire-purchase facilities to vehicle operation. Much of any misuse of such facilities that there may be could be avoided if the terms and rates agreed upon were not allowed to lessen the importance of sound costing principles. Thus, it must be appreciated that however a vehicle is purchased, the various items of operating cost have still to be met from the outset. Although this is obviously apparent with such items as petrol, oil and wages. for example, the real cost of depreciation accumulates daily although it may not have to be met for some time.
Taking as an example the £1,000 vehicle specified in the table, and allowing £100 for the initial set of tyres together with £125 as a nominal residual value, a balance of £775 remains. If a five-year replacement policy has been adopted, this would amount to £155 per annum, which would have to be met sooner or later regardless of the period over which any hire-purchase agreement applied. Reckoning tyre equip!Tient to cost £175 on the vehicle priced at £1,500, and allowing for the same percentage residual value as before, would leave a balance of £1,138 to be accounted for. Depreciated over seven years this would be equivalent to approximately £162 a year. Correspondingly, with the most expensive vehicle, on the same formula. £3,438 would eventually have to he written off. Assuming a life of 12 years for the heavier vehicle, the annual cost of depreciation would he £286.
In additiOn to depreciation, other items of cost, such as heavy repairs and tyre replacements, may also be expenses that have not to be met immediately, although it would obviously be prudent to make provision for their ultimate pay men t.—S. B.