Credit where credit's due is the makers' rule
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If you want credit on your new lorry the manufacturers and their dealers have the ability to help you. David Wilcox assesses manufacturer-backed finance schemes and reviews what is available
THERE IS A little-known rule or maxim attributed to a Kansas farmer by the name of John Cameron. John's Collateral Corollary states: "In order to get a loan you must first prove you don't need it."
For the haulier buying a vehicle — either new or used — from a franchised commercial vehicle dealer, one immediate possible source of finance is the dealer himself. Any self-respecting dealer will have an arrangement with a finance company and will point the customer in its direction.
Speaking to the dealers, manufacturers and finance companies, it is apparent that finance via the dealer is not so important for heavy commercial vehicle sales as it is for cars and light vans. Private car/van buyers frequently take up the dealers' or manufacturers' offers of credit whereas the haulier will often have already established credit facilities with a bank or finance house, whom he will turn to first.
But if a haulier is looking for credit on his next vehicle what do the manufacturers and their dealers have to offer? And is he likely to get a better deal by using the manufacturer's finance scheme?
Despite the fact that only a relatively small proportion of heavy commercial vehicle buyers will be seeking credit via the dealer, manufacturers are keen to offer finance schemes for both the new and used vehicles on their dealers' forecourts. The reason for their enthusiasm is simple; a good finance scheme boosts sales and also generates income via the interest charges. What other sales promotion technique has this double benefit?
Some commercial vehicle manufacturers, such as Mercedes-Benz, have one of the leading finance companies operate and administer their scheme. These "sponsored" finance houses are generally a subsidiary of a merchant bank and so clients can rest assured that their credit is from a reputable source.
In some cases, such as Karrier's Truck Finance, a separate company is established, jointly owned by the vehicle manufacturer and the finance company, and this exists solely to provide funds for vehicle purchase.
Other manufacturers like Ford or Daf prefer to keep it all in-house and have their own wholly owned or "captive" finance subsidiaries. With no external influences, and their raison d'etre purely to sell vehicles, does this mean that these in-house finance companies are more likely to provide credit and at more attractive rates?
This is a reasonable assumption, bearing in mind that they can be viewed as an extension of the sales or marketing effort. Most say that their number one priority is to sell vehicles; the revenue derived from the interest or finance charges is secondary.
However, they are not charitable institutions and will not extend credit at artificially low rates or, in a high-risk deal, purely to boost vehicle sales. They have to take sensible, commercial decisions; a bad debt does nobody any favours.
External finance companies That operate' credit schemes on behalf of manufacturers derive their income from finance charges and so may not hold vehicle sales in such high esteem; they have revenue coming from many other sources outside the commercial vehicle industry. But their agreement with the vehicle manufacturer is there for a reason and should carry some weight. Most will say that a haulier would stand a slightly better chance of getting finance via a referral from a dealer than if he applied independently.
Incidentally, these general finance companies that provide credit for all types of businesses and purchases say that underwriting commercial vehicle finance is an average risk — there are worse propositions that they view with less enthusiasm.
Franchised dealers are not compelled to promote their manufacturer's finance scheme. Instead, they are free to make their own agreements with any other external finance house if they feel it is more likely to offer credit or be more competitive. The proportion of the dealer network that opts for the manufacturer's finance scheme may indicate how good it is.
In short, dealers are not a captive market and so the manufacturers' schemes have to be competitive with general finance companies if they are to win their dealers' support.
The dealers themselves will often be clients of the manufacturer's finance company because the schemes usually have credit facilities for the dealers' own vehicle stocks.
All the financial packages offered by the vehicle manufacturers include the two basic types of deferred payment system; hire purchase and leasing. Despite the promotion of leasing in the last decade or so hire purchase remains the most popular form of acquisition in the commercial vehicle world. Most of the manufacturers' finance houses report that HP still accounts for 60 to 70 per cent of their business. As one spokesman said: "Ownership of the vehicle still means a lot to the average haulier."
The attraction of HP for the haulier is that he can claim the 100 per cent tax allowance for commercial vehicles in the first year. This means he can immediately subtract the full purchase price of the vehicle from his taxable earnings, even though he will not have paid the full price until the end of the HP agreement term which is when he becomes the legal owner of the lorry.
Most manufacturer's finance schemes offer variations on the HP theme. For instance, the monthly or quarterly repayments may be higher in the early stages of the agreement and decrease later on, meaning the bulk of the repayments are made in the first half of the period. The finance charges on this variable repayment HP should therefore be lower than conventional fixed repayment HP. Another type of HP scheme allows repayments to vary according to the season to take account of seasonality in the customer's business.
The HP interest rate being charged is obviously of top consideration but the repayment period and size of the initial deposit can vary considerably. This is one area where the manufacturers' own finance schemes reckon to score. Most claim that they are more flexible than the big commercial finance houses in the shape of the agreement they can draw up.
Two to five years is the typical repayment period for commercials while the deposit required usually ranges from 0 to 30 per cent. If the finance company feels the applicant or the deal is a relatively high risk then it will be looking for a deposit near the top end of this range, reducing the size of the loan. If it is assessed as a low-risk deal or the client is a "blue-chip" company, most manufacturers' finance companies will accept a much smaller deposit, even 0 per cent. The average haulier will end up paying 15-20 per cent.
A manufacturer that is particularly keen to help sales via its finance facilities may offer low deposit HP in order to tempt a haulier who cannot afford a substantial downpayment. This can be quite a carrot but it does of course mean that the sum borrowed is greater and so will cost more. Many manufacturers I spoke to made the point that they look for a "reasonable" deposit of around 20 per cent to reduce the risk of the haulier overstretching himself and struggling to keep up with the repayments.
Experience has taught the finance people that loan funds for light vans are a slightly higher risk proposition than those for heavy commercials; typical van buyers such as small businesses and light engineering concerns have shown a higher failure rate in recent years.
The popular alternative to HP is leasing and all the manufacturers' schemes offer this method as well. Because it does not have HP's advantage of 100 per cent tax allowance in the first year, leasing may be attractive to those companies who do not want to "shelter" profits from the taxman.
It therefore gained popularity in the recent, leanest years of the recession but now that a degree of profitability has returned to the road transport industry the growth curve of leasing is flattening out. It is estimated that about 15 per cent of new commercial vehicles are the subject of lease finance.
Unlike HP, a lease deal needs no initial deposit. It is the finance company that claims the 100 per cent tax allowance and passes on some of this benefit to the customer in the shape of lower rental payments.
The lease rental payments are treated as a trading expense and so the operator can deduct these from his earnings to reduce his tax bill. With HP, only the finance (interest) charges element of the instalment is allowable against tax. So the tax advantages of leasing are spread throughout the agreement (usually three to five years) whereas they are concentrated in the first year of an HP deal.
A result of manufacturers' and dealers' involvement with finance is the ability to offer lease with maintenance deals, sometimes called operational leasing because it extends leasing from a purely financial matter to an operational level.
With the vehicle's regular maintenance costs included in the rental payments this adds to leasing's benefit of planned and easily budgeted costs. This more comprehensive style of lease deal appears to be growing in popularity.
If deciding that leasing is the best way of financing a vehicle purchase, it is worth remembering that the finance house's desire to offer leasing varies with its parent company's (usually a merchant bank) tax position. If the bank's profits are high, then lease funds should be more freely available because the bank can use the 100 per cent . allowance to reduce its tax bill.
All sources of commercial vehicle finance are in stiff competition with each other so you cannot expect manufacturer-backed schemes to offer unrealistically generous deals or be willing to take on what is plainly a bad risk.
But if a haulier wants finance on his new vehicle and he has no existing contact with a finance company . .
• Try the manufacturer's/dealer's finance scheme, even if it refers you to a general, "High Street" finance company. The manufacturer's/dealer's agreement with the finance company and desire to sell vehicles may give your application the edge and mean that it will be more favourably received than an independent approach.
• As shown, some manufacturers operate their own in-house, wholly or partly owned finance subsidiaries. These are totally geared to the provision of finance for the manufacturer's vehicles as a sales tool and so may be more inclined to accept the marginal case. Most claim to be more specialised, understanding and flexible in their approach to commercial vehicle finance. They should certainly know the products and the business.
• Certain vehicles are viewed by finance companies as a safer bet than others; they are from reputable manufacturers and have a good resale value. Your choice of vehicle can therefore affect your chances of obtaining finance and the terms offered. • Franchised dealers for the same manufacturer are at liberty to have arrangements with different finance companies. So if refused credit by one, try another dealer in the same network — its finance company may take a different view.
• Try first your local dealer or the one who knows you best. In assessing the applicant, the vehicle and the deal, the finance house may consult the dealer who knows a littl about all three and who may support yot application.
• Finance companies are often reluctant 1 provide lease finance to a new busine: with no proven track record because if thr business goes into liquidation the financ company is low on the list of creditors lessor is an unsecured creditor). Therefor' the new owner-driver will probably stand better chance of obtaining HP.
• The availability of lease finance can var according to the wishes and tax position ( the finance house. If you are refused a lea: deal by one, this may not be a true reflectio on your creditworthiness; another financ company's tax position may allow it t reach a different decision.