Motor Vehicle Finance
The old saying,
"if it has wheels-we will finance it."
Pre-approved credit limits make leasing finance easy for you and your clients.
pre-approved credit limits are simply pre-arranged finance limits put in place for future financing requirements. They can be for single assets (generally motor vehicles) or for multiple assets purchased over a length of time.
Definitions of Credit Limit Structures:
- Pre-approved credit limits can be used for single assets (generally motor vehicles). These are valid for a maximum of 90 days. Most credit limits are set up for multiple assets over a longer period of time.
- Purchase credit limits allow for multiple assets to be approved in the one application. The facility is fixed and when finance is drawn down it is not renewed. There is no minimum limit for purchase credit limits however it is advisable and practical to set up for amounts in excess of $100K.
Financiers assess the credit worthiness of a client via various quantitative and qualitative techniques. Credit assessment however is not a precise science and the credit judgement is often used to determine whether an application is approved or declined. The purpose of this document is to simplify the credit process and to give practical guidelines to make the process as efficient and profitable as possible. Financiers may look at a balance sheet differently to an Accountant or Financial Planner so it helps to understand how financiers assess credit applications.
Motor Vehicle and Equipment Finance vs Housing Finance Home Loans
Housing finance is based on a person’s ability to repay the loan but also a strong secondary position taken by the lender against the asset itself (i.e. a bank has the mortgage on a house). Commercial finance, which includes motor vehicle and equipment finance, is based predominantly on the cash flow of the borrower. Extra security is generally not taken against further assets (i.e. if the borrower defaults the financier can only recover funds from the resale value of the asset). Selling assets quickly at auction may resultin a significantly lower amount received especially for assets such as office equipment, furniture and fittings.
New equipment finance
Some equipment finance advisors starting to write business receive a difficult deal such as a fitout for an office or restaurant which is subsequently declined. This creates a negative image regarding motor vehicle and equipment finance that it is “too hard”. In reality, this type of finance is one of the easiest products to write especially if equipment finance advisors focus on the right types of clients and equipment.
- Proven by being in business or current field of employment for greater than two years. Individuals who are starting businesses but can demonstrate strong management and experience in the industry will be considered.
- Individuals - no negative credit reference report. Established credit history. Home owners with reasonable equity. Company - Strong working capital, sound trading history, equity in balance sheet with retained earnings, no repeated repayment problems from a particular industry
- Ability to meet repayments, determined by the applicant’s income or financial statements
- The client’s asset backing, which is evidenced by the applicant having equity in their home and/or other tangible asset backing such as managed funds.etc .
- Any other factors relevant to granting approval. Cars vs equipment credit process is very different.
- If the applicant does not have the above qualities, equipment finance advisors will have to demonstrate to financiers why the applicant should be given finance when the criteria is outside their credit policy. These reasons should be documented clearly in the comments section of the application.
- Clients that do not satisfy the financing criteria may have a better chance of obtaining finance, particularly for motor vehicles, if they are able to pay a deposit or make a large initial payment of the total asset cost (such as 20%). In this instance, it is best to talk to the financiers before submitting an application.
Perceived as High Risk What Financiers Don’t want
- New ventures. Tax returns not completed.
- Defaults, bankrupts. Directors, guarantors not asset backed. History of losses and poor working capital. Directors who will not guarantee their debt is seen as a character issue.
- Highly geared, earnings cannot support further borrowing.
- Cash businesses that don’t declare income.
- Little or no personal wealth created.
- Particular industries. Each financier will have different lists.
Motor vehicles including cars, vans and trucks
Commercial vehicles including trucks, buses, trailers, prime movers.
Earthmoving equipment (yellow goods) bobcats, loaders, excavators.
Medical and dental equipment
Manufacturing equipment including engineering, metal and wood working.
Agricultural equipment tractors, headers etc
perceived high risk equipment
Boats, planes - Need to confirm that they will be used for assessable income in established business. Due to third party liability, financiers prefer these goods to be financed as chattel mortgage as the client is the owner and is liable for risks.
Professional office fit outs, demountable partitions, desks, and chairs as goods are worthless if sold. Generally prefer professionals and the amount borrowed to be less than $100K. For example, Accountants, Doctors, Pharmacists, Solicitors, etc. Restaurant fitouts are extremely hard to finance.
Computers particularly if software component exceeds 20%.
Specialised equipment with no secondary market and low resale value.
Used equipment greater than 4 years old. However, cars, tractors and trucks older may be acceptable. Please speak with the financier for more information.
Projects that require labour and capital works to be funded. For example, installation of equipment, concrete slab.
Clients purchasing assets privately need to be aware of the greater risks involved with these types of transactions. As the seller is an unknown party, extra precautions need to be taken to protect both the financier and the client. For this reason it is important to ascertain that the asset is appropriate security for its value and age. This will
Help protect the client from buying a ‘lemon’!
The following must be considered when financing a private sale:
- Clear title on the asset.
The financier must establish who has clear title on the asset being purchased. If the seller’s bank has an “all monies clause” or fixed and floating charge, the bank must release their interest in the asset.
- Inspection of the asset.
In some cases, an inspection of the asset will be required. The financier’s staff may complete the inspection or in some cases you may be able to provide an inspection report for the financier.
- Additional costs
Financiers impose additional loadings for privately financed assets due to the extra work involved.
- Refer all private sales to financiers
You must refer all private sales to the financiers. The financiers can inform you of additional costs/loadings on the finance. The additional requirements are in the client’s best interest.
- Expect a longer Timeframe
Timeframes for private sales are longer when you factor in determining clear title and the inspection ofthe asset. Ensure you communicate this to the client to set realistic expectations