The Chosen Payments CEO has been added to the Electronic Transactions Association's (ETA) 2019 Forty Under 40 class.
The question is whether a non-traditional loan structure makes sense. The answer varies for every car buyer. Whether it is a single vehicle purchase, a fleet expansion, or a bulk buy, the pricing for those who do not pay cash can potentially make or break an operator’s cash flow.
Every operator must determine what vehicles are needed and when. This requires knowing the total cost of ownership and acquisition — the cost of buying, running, and maintaining each individual fleet vehicle so information can be compared to the revenue a vehicle generates. Mileage, warranties, and vehicle demand certainly all play a role in the final decision, but these basics help determine if a car must be replaced annually or if it can be run much longer.
When financing a vehicle, no one should be paying for one that has aged out or is no longer earning revenue. The life of the vehicle should not be shorter than the loan term. Once calculated, there are still several options offered on vehicle loans that can affect the true measurement of vehicle cost in the form of financing.
Let’s look at some of the loan characteristics that sound like they save money for a buyer. Some are excellent deals, and others deserve cautious consideration.
No Down Payment
This option on a loan makes the initial cash requirement zero. With a no-down-payment loan, the full value of the vehicle is financed at the agreed-upon purchase price, but no “up front” money is needed to close the deal and drive the car off the lot. Depending on local regulations, licensing and registration may need to be paid separately, but those are smaller cash outlays. The great part about this loan feature is it preserves operating capital for owners. In this cash-tight industry, the advantage is clear — less capital is needed to get into the car, and the asset itself can start earning right away, even before the first payment is made.
One view believes in paying for the asset as you go — in that way, the revenue it creates pays for its cost along the way. This idea makes the no-down payment attractive, although there is no equity in the asset. If managed perfectly, paying for the cost of what is used as you use it, then by definition, the asset was worth what it sold for at the end. Only monthly payments are involved with no bulk cash payment at the start or end of the financing.
One difficulty with this option is it requires “good cash flow and stellar credit,” says Mike Villani of Auto One Capital in Melville, New York. “We would never want to put a customer in a bad situation,” he adds. Some clients who would qualify for a loan with no down payment often reject this option to lower monthly payments even more, and maybe to qualify for a larger loaned amount.
The possible downside to this type of loan becomes clear when and if the car is no longer usable, but a sizeable amount is still due on the loan. For example, the vehicle could be in an accident, and the insurance company considers it totaled at its current market value, but that value is lower than the amount due on the loan. The operator still must pay off the loan. Now, if cash is available, a situation like this may not be as painful. After all, the cash was used to run the operation for as long as the vehicle was in service. It is unfortunate, but the total loan payments would be the same. However, if no cash is available to pay off the loan, the buyer has to make payments on a vehicle that no longer exists. Ouch.
This same situation of paying for a non-earning asset could also occur if a client demands a certain vehicle like a shuttle, but then the contract is not renewed, and the operator has a fleet vehicle with no immediate use or paying client. It can be a real cash burden for most small- and medium-fleet operators. The only way to avoid this is to perfectly use, pay, and depreciate over the term.
Zero Percent Financing
This loan option has no interest charged on the loan. This is a great deal — to borrow money without having to pay more than what was borrowed. It is something occasionally offered by vehicle manufacturers to move their inventory for newer models on the way to the showroom floor. The dealer still makes money on the purchase price and is choosing to forgo the additional profit of interest. For operators, it is a deal worth searching for to lower the total cost of a loan. In addition, with no interest expense, monthly payments will be lower than they would be with interest added. A 0% loan could require a down payment since the lender is taking a greater risk, but that depends on the buyer’s credit and the loan’s parameters.
A buyer who chooses this option sees few if any financial downsides. Nonetheless, it is probable that the vehicles offered for sale with this option are less popular, or will be a model year older than a competitor’s vehicle. But a well-priced deal is a good deal. When body styles have not changed for a new model year, and the dealer is willing to offer zero or low interest, it can be a wise purchase. But buyer beware. It may also be that acquisition incentives, discounts, and rebates disappear with 0% financing. Instead, the buyer may be exposed to an overall higher purchase price to compensate for the lost interest.
No Payment For 90 Days
This option defers the first loan payment for three months. Villani is “not a big fan” of this loan option because it ultimately costs more in the long run as the bank spreads out the interest for those 90 days over the much longer life of the loan. “I try to talk them out of it,” Villani adds, even if they meet the stringent qualification requirements.
Sometimes there is good reason to take on a more expensive and riskier loan like this. Perhaps an operator chooses it because he knows cash flow is rising in a short time, and he needs the new vehicle sooner. Occasionally, dealers offer this specifically in low seasons, so an operator can have the vehicle sooner but not pay until business picks up during a higher-volume season. Or a contract for a shuttle, for example, may require a new vehicle to serve the client, but the revenue payments won’t start for several weeks.
Unfortunately, this feature accrues interest on the full loan amount during the 90-day period, so it is more expensive for a buyer over the loan’s term. However, certain situations require a specific or custom-built vehicle be available, so a loan that allows the vehicle to be built might make the most sense for some. It may be combined with other features, too, like no down payment.
With this option, the risk to buyers is like a zero-down program. In addition to its higher overall cost, if there is an accident or the contract doesn’t come through, an operator may be left with an unneeded vehicle. Selling it will happen at a lower price, and the increased interest over 90 days combined with the vehicle’s months of depreciation will cause an operator to lose money. In addition, you’re instantly underwater and have negative equity in the equipment. If those initial payments are not affordable, it is unwise to move forward.
Finding The Right Fit
Because so many operators must finance their fleets continually, making the best use of loan options must be tempered with financial prudence. Knowing your finance company and making them a business partner is always good advice. They have the experience to suggest what works and foresee problems, even if you qualify.
If your lender knows the industry, you will get better advice, too. The many lenders who exhibit at International LCT Shows have years of livery experience. They know the life spans and costs of different manufacturers. Limos and shuttles are familiar assets to them, and a good partner also knows your regional demands. Everyone’s situation is different. Let a professional walk you through proven programs.
If you are starting out, ask for recommendations, visit the finance companies at the Show in March, and always get offers in writing. Once you find the right partner, it could become the company that helps you through years of growth. Even better, industry commercial lenders often will put together an overall acquisition program and line of credit that allows for the continuous replacement of vehicles. That type of relationship borrowing — rather than transactional, one vehicle at a time — may reduce the overall risk and cost of turning over your fleet.
What If Things Go Bad?
Loans will not usually present a challenge if you get the right loan for starters. One critical component is the value of the vehicle at the end of the lease or the financing term. Often, operators will find themselves upside down, further complicating the process of getting out of the old asset and into the new asset. Even if you’ve planned well, Mother Nature’s fury or an accident can take out a financed vehicle. Unfortunately, this can threaten cash reserves and credit ratings.
This is where that established and trusted partner is even more valuable. Villani and his team arranged all kinds of exception financing when Hurricanes Sandy and Katrina hit. For those who had no revenue and had to recover, payments were sometimes deferred or loans were rewritten. No one wants to take a vehicle back from an operator, so someone who knows your needs will be able to better help in times of trouble.
If you choose to take a lease or loan directly from a manufacturer, they have no recourse to you beyond expressed warranties. Some are known to help in selling a vehicle no longer wanted and will use the proceeds to pay off the debt, but it is rarely enough. A lender partner is different in this regard and has more ability to restructure financing in addition to assisting with unloading an unwanted collateralized vehicle. Let a good business partner help recover potential debt losses with you.
With a solid lender behind you, there is no need to worry about being offered unscrupulous loans that could hurt your financial security. By not overextending, being prudent, and still taking advantage of great options, financing will be a smooth activity that enhances your cash flow and improves your fleet.
The Chosen Payments CEO has been added to the Electronic Transactions Association's (ETA) 2019 Forty Under 40 class.
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