Money talks, so learn to converse with it
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HOW MANY buyers pay proper regard to the financing of vehicle purchase? The minority, I suggest. Decisions tend to follow the path of deciding what type of vehicle is needed, followed by price consideration. The financial decision to purchase is made independently along very narrow, well-defined lines, based mainly on previous experience.
The people who make these financial decisions do not have access to any really good sources of information on financing; do not feel the need to consider the alternatives (what was good enough last time); and are daunted by the reluctance of both finance companies and banks to pass on unasked-for information.
The buying decision comes in two parts which are inter-related but not interdependent. The first decision is what to buy. This article will not influence that decision except to say that the person who makes that decision and negotiates that side of it, is not always the person who makes the next decision — how to pay.
The demand for a vehicle is generated by the business and business must pay for it. Enormous differences can be made to budgeting by varying the financing period to suit the projected life of the truck. There is little point, particularly on leasing, in building up the vast equity in the vehicle. There is also little point in financing it over five years and wearing it out in two.
Alternatively, if there are peaks and troughs in earnings, then there are financing methods available to take this into account, too. Probably the most often asked question is, what is the difference between hire purchase and leasing? The answer will not lie in the figures that are obtained when asking for a quotation.
If you acquire a capital asset, this includes commercial vehicles of all types, then the Government will waive the tax bill payable on that portion of profits that are used to pay for it. They are not interested in how you found the money, only that you have good title to the asset. The rate at which they allow claims for taxation allowance is variable, during a Budget, but has been at 100 per cent for some time now. This means that every penny spent is allowable against profits generated in the tax year of the purchase. Remember this still leaves funding options open between cashflow, bank overdraft or loan and all the varieties of hire purchase.
In some circumstances, the allowance is of no practical value to the business. There are some profits not expected for some years owing to setting-up expenses; the purchase figure represents several years' profits; you have already purchased some capital assets for a more direct branch of the business; you have purchased several vehicles as replacements and new work for the new one will not guarantee sufficient profit for 100 per cent write-off in the first year and lastly, you wish to reserve your capital allowance situation for an intended purchase later.
If the allowance is of no value to you, then you can give somebody else the opportunity to claim it against that purchase. They in turn can reduce the amount they charge you to rent the vehicle from them because they have received pecuniary advantage from the transaction. This is leasing. I would say that any business that cannot envisage using the capital allowance against taxable profits within two years of the date of purchase should lease the truck.
There are other considerations. Leasing is off balance sheet. There were some moves in the accounting fraternity to ensure that companies were not distorting their balance sheets by over-use of lease funds.
This sort of abuse could be attractive to companies who have sensitive balance sheets.
Remember that we are discussing funding as opposed to usage and that all. other practical considerations remain unaltered. The user is responsible for all on-going running costs unless he opts for contract hire, which is not a funding method per se.
All reputable lease contracts have a fixed term with arrangements for participation in the eventual proceeds of sale of the vehicle. This participation ranges from 90 per cent to 100 per cent and can be a negotiable point. All lease agreements are arranged to ensure that good, sound legal title remains with the lessor until such time as the
lessee no longer wishes to use the vehicle. This is to ensure that the lessor maintains good title to the taxation allowance and it is a relatively painless procedure to follow. At no time can the lessee acquire taxable title to the vehicle. Any person or company who says that he can arrange this is misleading or attempting to put the vehicle on hire purchase.
There are ways in which an associate company can acquire title from the lessor, but stop and think why you wish to acquire a threeor four-year-old truck at all? Its asset value is not sufficient to justify the investment of capital. Better by far to pay the peppercorn rental until such time as replacement becomes a necessity and use the proceeds of sale as an investment in advance rentals or hire purchase deposit on the next one.
The gearing of hire purchase and leasing agreements was very slanted towards leasing at one time, but has become more equal now. At one time a financing company would have looked for 20 per cent of the quoted price plus all of the invoiced VAT as an advance payment on HP,' but would require three months of a 36-month agreement on leasing, effectively 8.33 per cent of the invoice price, plus VAT on the advance payment only. Hire purchase deposits can now be this low, although there is still a strong bias towards ensuring sufficient equity in a hire purchase contract.
The other two options on funding vehicle purchase are cashflow and the bank. Your own cash flow is the cheapest by far and the most vulnerable to variations in business. Experience shows that most businesses would do better to consider investing cash resources in non-fundable areas of business such as premises, bulk stock purchases, staff incentives to greater productivity, etc, or for investment purposes, property, stocks and shares and long-term gilts.
The bank is an oft-used alternative and the bank manager plays a vital role in the funding of any successful business. Many businesses fold due to not winning the bank manager's confidence. There is much to be said for involving the bank manager in the purchase — he will, want to see budgeting figures and will want to advise on cashflow forecasting. He can assist greatly by having the connection with the bank's in-house finance company.
This is. an informal arrangement which can allow him to give information outside of the _normal bank reference, which could (but does not always) help the financing company to make an underwriting decision. He will not want to interface directly in the deal or even its correctness, but he will need reassurance that you have allowed for eventualities. This assumes that the purchase is a large one in relation to your business but it always pays to keep the bank manager informed. He is a useful ally in the struggle to acquire money and should be treated with businesslike respect. While they are not usually experienced businessmen per se they are experienced in assessing business for professionalism and will look for certain signs that you have properly assessed the risks involved and can discuss them unemotionally.
All the most successful businesses qualify their risks before taking them. The bank manager has two nding methods at his disposal, verdraft and loan. Overdraft is facility granted against an ordiry bank account, whereby you n draw money without further ference over your cash reurces up to a pre-agreed ure. The figure agreed will dend very much on the security ered and is more likely to be rmal. This formal security uld be in the form of an "all onies due" charge, which is a eeping document making the nk title holders to your busiss if they should need to be. It uld be some form of property; is could belong to the business you privately, the only reirement is that it is registered the land registry. Additionally separately, they will prefer to e your guarantee.
his is particularly true where the money they lend is in excess of the money that is invested or built up in the business. Having secured an overdraft limit, the borrower is required to provide the bank with ongoing information as to the progress of the business. Bank loan is dearer than overdraft. This is because overdraft monies are charged day to day and only on the balance owing.
Bank loan is similar to HP, in. being an agreed amount of interest and a fixed repayment. It is only recently that banks have been more willing to grant small to medium businesses unsecured or partially secured loans.
Banks have vastly greater facilities and legal back-up to secure their debts. It is a banking fact that if you have some form of asset, say a close-to-maturity life policy, lodged at the bank in open safe custody then they could be considered to have a banker's loan on that asset against other monies. Banks should be used for cash-flow purposes and not for capital asset acquisition. There are many times that vehicle purchasers have borrowed from the banks only to find themselves short of borrowing facilities when a good opportunity to expand presented itself.
Nevertheless, there is scope for a dual arrangement whereby the bank lends the deposit secured against other assets and the finance company lends the rest secured against the vehicle. The finance company is happy to collect its fixed repayments which steadily increase the equity, thereby fulfilling the bank's security requirement. The money the vehicle earns, pays both interest payments and profit.
These are the various packages available. To obtain this sort of finance, the businessmen must be armed with some information. It would be as well to sort out the financing of the vehicle before committing yourself to purchase undertakings. Commerical vehicle dealers are reluctant to build for unknown customers unless they are confident that financial arrangements are in order.
The first sequence of events is to sit down and do a detailed budget for the purchase, particularly if it is an additional vehicle. This will show how long it will take to recover the capital cost, which will dictate how long to finance over. The next step is to approach the bank and to canvas offers of financial help from them. A split facility of overdraft for cashflow (customers take time to pay, etch plus loan to offer as deposit seems the best bet.
Remember the security aspect assets must be kept solvent, and debts serviced to draw a good living. Then approach the dealer to discuss specifications and pricing, tell him exactly what you have in mind for the vehicle but avoid over-specialisation. Ask him to quote for finance. If he has a full-time specialist, the quote will be detailed after much discussion. You will, in all probability, be asked if balance sheets are available and your personal guarantee also. Your guarantee is just that; if the business cannot or will not pay, you must. If guarantees are required (and it is common but not mandatory), make sure that all the directors are willing to sign as guarantor — even if it is "only the wife"! Balance sheets are usually historic records of past progress and, for this purpose, will need to be audited. If there are no balance sheets available have a proper statement of affairs drawn up by your accountant, or at least a letter of intent or written contract from somebody you work for — this must have a time element in it and better still, rates chargeable and extent of work available.
Ask the dealer whether it would be possible to use the bank's own finance company. He should readily agree except perhaps where leasing is involved. Leasing costs vary widely from one part of the year to another and from company to company — the dealer specialist will know which are quoting the best rates. I suggest that you allow the dealer to put a finance proposal to the finance company, if you have decided that his make of vehicle is shortlisted. This takes between two and 14 days to process and can involve further negotiations.
Inform your bank manager what you have done and ask him to respond to written requests for a reference by phone; he will not do this automatically — you must ask. If you have approached several dealers, he will be asked to give several references. Due warning will allow him to formulate his reply and delegate a member of his staff to give the reply. It also keeps him informed and your options open. You will then be in a position to make a rational reasoned decision, based on fact rather than fantasy.
Remember also that a quotation is just that and remains an area of negotiation throughout. Return to the dealer and ask questions — if he is professional he will value that. If you have obtained confidence in both the dealer, his product and his backup, then you can now order with confidence, place a substantial deposit and await delivery, knowing exactly how much the vehicle must earn to pay its keep. Everybody is happy, the purchase is properly funded and all that remains is the fairly assessed business risk, which is what brought you to the market place in the first instance.