Expert advice for securing vehicle finance

Obtaining vehicle finance remains a monumental hurdle for commercial operators, and the current bleak economic outlook in South Africa is not helping. LIANA SHAW investigates.

When asked whether vehicle finance was readily available in the current economic climate, John Loxton, head of fleet management and leasing at WesBank, responded: “I don’t think there is one universal response that would cover this question. For start-ups, it remains a very challenging prospect, especially given the current headwinds faced by the industry. For existing operators, the outcome will depend on their most recent financial performance, confirmation of secured contracts, as well as their track record with financial institutions, to a lesser extent.”

Dave van Graan, head of special projects for MAN Automotive SA, added: “As in all economic cycles, the appetite to extend credit in economic boom periods is higher than in recessive periods.”

He went on to explain that the type and scope of securitising collateral will always depend on the magnitude of the borrowings, coupled to the risk factors associated with those borrowings, and that sometimes when finance is taken purely for fleet replacement, existing securities are sufficient, whereas finance for expanding operations may require additional collateral. “Every transaction has to be viewed on its own merits,” he said.

When asked to outline precisely what financial institutions require by way of collateral, Loxton confirmed this would depend on each individual transaction. “Within the instalment credit market, we typically rely on the asset value. In some instances we do call for deposits, depending on the structure of the transaction,” he said.

He added that this was less of a concern within the fleet-management and leasing market, but with the caveat that the financials would support the cash flow and that it falls within a minimum level of affordability.

Sound contracts a good starting point

The best way to go about securing finance, according to WesBank, is for the applicant to provide a sound contract. Assuming this is in place, final approval would then depend on the contractor’s proven track record and historical financial performance.

The owner-operator would then have the choice to approach a bank for finance or the rental of the asset(s), with that financial institution applying various qualifying criteria in order to arrive at an outcome in respect of the application.

According to Van Graan, in the case of an original equipment manufacturer, all that would-be owner-operators need to do is to make contact with one of their financial services business-development managers, who would then walk them through the funding and finance process and the respective options available.

Reiterating the importance of applying for finance with a sound contract, Van Graan said: “Should the owner-operator have access to a long-term contract, and a reasonable financial standing and track record, we will support them in all matters financial.

“Where things become difficult is when an applicant cannot bring basic financial statements, banking records or, most importantly, a clear picture of the total operating costs associated with the planned transport operation,” he explained.

As for allegations surrounding lenders charging extremely high rates to higher-risk businesses, coupled with the length of the repayment term, and the suggestion that this could be hampering vehicle sales, Loxton said: “We should be careful not to subscribe to populist statements without any substance. A relatively high interest rate is normally a function of the risk associated with the transaction. The term of the agreement would have to be accepted by the customer.

“The combination of the two would present the customer with a monthly financial commitment that would be accepted or rejected. Under the auspices of the National Credit Act, in terms of affordability and treating customers fairly, I think customers can rest assured that their interests in any finance agreement are well protected when transacting with a bank. The same cannot necessarily be said of unregulated lenders and it would be irresponsible to respond on their behalf.”

These sentiments were echoed by Van Graan: “The rate of the cost of borrowings has always been linked to the credit risk associated to those funds. This is nothing new and applies universally to everyone. As the financial track record of every entity borrowing funds from any bank improves over time, so do the interest rates.

“Working closely with our own business partner, MAN Automotive, we are able to off-set the costs of funding interest through other aspects such as proven fuel efficiency, lower costs of maintenance and guaranteed residuals.”

He concluded: “In the end it is about the net costs represented in cents per kilometre which really count for the customer’s long-term creditworthiness.”