Car finance has become big business. A huge number of new and used car buyers in the UK are making their vehicle purchase on finance of some sort. It might be in the form of a bank loan, finance from the dealership, leasing, credit card, the trusty ‘Bank of Mum & Dad’, or myriad other forms of finance, but relatively few people actually buy a car with their own cash anymore.A generation ago, a private car buyer with, say, £8,000 cash to spend would usually have bought a car up to the value of £8,000. Today, that same £8,000 is more likely to be used as a deposit on a car which could be worth many tens of thousands, followed by up to five years of monthly payments.With various manufacturers and dealers claiming that anywhere between 40% and 87% of car purchases are today being made on finance of some sort, it is not surprising that there are lots of people jumping on the car finance bandwagon to profit from buyers’ desires to have the newest, flashiest car available within their monthly cashflow limits.The appeal of financing a car is very straightforward; you can buy a car which costs a lot more than you can afford up-front, but can (hopefully) manage in small monthly chunks of cash over a period of time. The problem with car finance is that many buyers don’t realise that they usually end up paying far more than the face value of the car, and they don’t read the fine print of car finance agreements to understand the implications of what they’re signing up for.For clarification, this author is neither pro- or anti-finance when buying a car. What you must be wary of, however, are the full implications of financing a car – not just when you buy the car, but over the full term of the finance and even afterwards. The industry is heavily regulated in the UK, but a regulator can’t make you read documents carefully or force you to make prudent car finance decisions.Financing through the dealershipFor many people, financing the car through the dealership where you are buying the car is very convenient. There are also often national offers and programs which can make financing the car through the dealer an attractive option.This blog will focus on the two main types of car finance offered by car dealers for private car buyers: the Hire Purchase (HP) and the Personal Contract Purchase (PCP), with a brief mention of a third, the Lease Purchase (LP). Leasing contracts will be discussed in another blog coming soon.What is a Hire Purchase?An HP is quite like a mortgage on your house; you pay a deposit up-front and then pay the rest off over an agreed period (usually 18-60 months). Once you have made your final payment, the car is officially yours. This is the way that car finance has operated for many years, but is now starting to lose favour against the PCP option below.There are several benefits to a Hire Purchase. It is simple to understand (deposit plus a number of fixed monthly payments), and the buyer can choose the deposit and the term (number of payments) to suit their needs. You can choose a term of up to five years (60 months), which is longer than most other finance options. You can usually cancel the agreement at any time if your circumstances change without massive penalties (although the amount owing may be more than your car is worth early on in the agreement term). Usually you will end up paying less in total with an HP than a PCP if you plan to keep the car after the finance is paid off.The main disadvantage of an HP compared to a PCP is higher monthly payments, meaning the value of the car you can usually afford is less.An HP is usually best for buyers who; plan to keep their cars for a long time (ie – longer than the finance term), have a large deposit, or want a simple car finance plan with no sting in the tail at the end of the agreement.What is a Personal Contract Purchase?A PCP is often given other names by manufacturer finance companies (eg – BMW Select, Volkswagen Solutions, Toyota Access, etc.), and is very popular but more complicated than an HP. Most new car finance offers advertised these days are PCPs, and usually a dealer will try and push you towards a PCP over an HP because it is more likely to be better for them.Like the HP above, you pay a deposit and have monthly payments over a term. However, the monthly payments are lower and/or the term is shorter (usually a max. of 48 months), because you are not paying off the whole car. At the end of the term, there is still a large chunk of the finance unpaid. This is usually called a GMFV (Guaranteed Minimum Future Value). The car finance company guarantees that, within certain conditions, the car will be worth at least as much as the remaining finance owed. This gives you three options:1) Give the car back. You won’t get any money back, but you won’t have to pay out the remainder. This means that you have effectively been renting the car for the whole time.2) Pay out the remaining amount owed (the GMFV) and keep the car. Given that this amount could be many thousands of pounds, it is not usually a viable option for most people (which is why they were financing the car in the first place), which usually leads to…3) Part-exchange the car for a new (or newer) one. The dealer will assess your car’s value and take care of the finance payout. If your car is worth more than the GMFV, you can use the difference (equity) as a deposit on your next car.The PCP is best suited for people who want a new or near-new car and fully intend to change it at the end of the agreement (or possibly even sooner). For a private buyer, it usually works out cheaper than a lease or contract hire finance product. You are not tied into going back to the same manufacturer or dealership for your next car, as any dealer can pay out the finance for your car and conclude the agreement on your behalf. It is also good for buyers who want a more expensive car with a lower cashflow than is usually possible with an HP.The disadvantage of a PCP is that it tends to lock you into a cycle of changing your car every few years to avoid a large payout at the end of the agreement (the GMFV). Borrowing money to pay out the GMFV and keep the car usually gives you a monthly payment that is very little cheaper than starting again on a new PCP with a new car, so it nearly always sways the owner into replacing it with another car. For this reason, manufacturers and dealers love PCPs because it keeps you coming back every 3 years rather than keeping your car for 5-10 years!What is a Lease Purchase?An LP is a bit of a hybrid between an HP and a PCP. You have a deposit and low monthly payments like a PCP, with a large final payment at the end of the agreement. However, unlike a PCP, this final payment (often called a balloon) is not guaranteed. This means that if your car is worth less than the amount owing and you want to sell/part-exchange it, you would have to pay out any difference (called negative equity) before even thinking about paying a deposit on your next car.Read the fine printWhat is absolutely essential for anyone buying a car on finance is to read the contract and consider it carefully before signing anything. Plenty of people make the mistake of buying a car on finance and then end up being unable to make their monthly payments. Given that your finance period may last for the next five years, it is critical that you carefully consider what may happen in your life over those next five years. Many heavily-financed sports cars have had to be returned, often with serious financial consequences for the owners, because of unexpected pregnancies!As part of purchasing a car on finance, you should consider and discuss all of the various finance options available and make yourself aware of the pros and cons of different car finance products to ensure you are making informed decisions about your money.
As the world around us continues to adapt to a new sense of normal in light of COVID-19, we at Smythe LLP (Smythe), recently sat down (virtually) with Kendall Hanson from CHEK News to discuss how we’re adapting to working from home and what is means for us as a firm, as well as the communities we live and work in.
Although we may be smack dab in the middle of our busiest time of year, things at Smythe are still business as usual – with a few notable exceptions.
The first, and probably most obvious, is that nearly all our staff have now transitioned to working from home.
“The first week of office closures and having everyone work from home was definitely a week of transition, but I think everyone’s really quickly adapted to it and gotten used to it and a lot of people are really enjoying it,” said Partner, Trevor Topping.
During a time where our offices would normally be a buzz with client visits and meetings, our offices are now closed to the public and a skeleton crew has been put in place to ensure clients are able to safely drop off necessary files and mail is being received and sent out.
To read the full article and to hear what Trevor had to say about Smythe’s new normal, click here.
For more information on our response to COVID-19, or to learn what support is available to you, please visit our COVID-19 Resource Centre, or reach out to your Smythe Partner directly.
Given the current economic uncertainty, effective cash flow management will be critical for the success of many businesses. This will likely involve a combination of:
Managing working capital levels
Managing discretionary expenses
Obtaining additional financing
Working capital management can take the form of:
Implementing Credit Policies
By implementing credit policies with your customers you can speed up the collection process. This could include requiring upfront deposits, reducing the credit terms or offering incentives for early payment. Always ensure you follow-up on overdue accounts.
Utilizing a Just-in-Time Inventory System
Unless it will hurt your ability to sell, don’t carry extra inventory.
Using Credit Terms to your Advantage
Unless they are offering worthwhile incentives, don’t pay your suppliers until it is necessary.
A tool that should be utilized to help with managements’ decision making, is a cash flow forecast. This will help you assess the impact of working capital and expense management decisions, as well as determine whether additional financing will be required.
If you decide that you need to obtain financing (see below), it is likely that the lender will require a forecast as part of the application process.
Obtaining Additional Financing
As part of the economic stimulus package, the Government of Canada is working to ensure businesses have access to traditional financing, from both the government and private lenders.
Among the products being targeted to COVID-19 relief are:
Working Capital Loans
Funds to provide working capital for the operations, and cover general operating expenses, as opposed to capital purchases or expansions. There are currently programs in place where loans can be approved within 48 hours or maybe available without any payments for the first six months. BDC loans of up to $100,000 can be applied for online.
Loan Guarantee for Small and Medium-Sized Enterprises
As part of the Business Credit Availability Program, EDC is partnering with financial institutions to guarantee 80% of new loans or credit requests up to $6.25 million for small and medium-sized enterprises. Financing is meant to be used for operating costs and is available to exporting and non-exporting companies. The idea behind the program is to encourage additional funding from banks as the EDC provides a re-payment guarantee of 80%. This program is now available through your bank or credit union.
Bridge Financing Program
Offered through BDC Capital, this special program may match (with a convertible note) a current financing round being raised through qualified existing and/or new investors made into eligible Canadian start-ups. This program is best suited for high-potential companies that have venture capital investors willing to support them. BDC will then invest alongside these groups. There are separate criteria for both companies and investors who wish to take advantage of this program – for full details, click here.
Term Loan and Lease Payment Relief
Ability to delay payment of principal for up to six months on existing loans.
Increases to Existing Line of Credit
Financial institutions are providing increases to the borrowing limits on existing lines of credit.
Purchase Order Financing
Flexible terms are being offered to ensure existing and future orders can be fulfilled.
Export Development Canada is providing buyer financing and direct financing for international sales to ensure Canadian businesses are able to participate in international trade opportunities.
If your business requires cash flow management or additional financing, please contact your Smythe Partner directly as additional reporting may be required. Our team can match your business with the appropriate product and guide you through the process and provide financial information to the lending institutions.
the Government of Canada announced the Canada Emergency Business Account interest-free loans that provide up to $40,000 for small businesses and not-for-profits that have been financially impacted by COVID-19. On December 4, 2020, the program was expanded to offer an additional $20,000 to businesses that continue to be seriously impacted by the pandemic. The loans are available through eligible financial institutions, and businesses must apply through a financial institution where they had an existing relationship. The loans are interest-free, and 25% of the original $40,000 of the balance and 50% of the additional $20,000 of the balance is forgivable if the business repays the loan by the end of 2022. Businesses are required to have had an annual payroll of $20,000 to $1,500,000 or non-deferrable expenses of at least $40,000 in 2019 to qualify.
Businesses have until March 31, 2021, to apply for a loan or the $20,000 expansion. In the case where applicants are waiting for their financial institution to finalize the submission of additional information, they will have until May 7, 2021, to complete the submission.