Exploring Different Financing Options for New Car Buyers 1
Table of Contents
This section introduces car financing, emphasizing the significance of selecting the right financing option for new car purchases. It discusses the impact of various financing choices on a buyer’s financial health and the total cost of owning a car, aiming to provide foundational knowledge to navigate car financing effectively.
Traditional Car Loans
Here, the focus is on traditional car loans, which are one of the most common methods for financing new vehicles. This part explains the typical structure of car loans, including interest rates, loan terms, and repayment schedules. The benefits of choosing Car Loans such as potentially lower interest rates and the ability to own the car outright after loan completion are discussed in detail.
Bootstrapping
Bootstrapping is to finance your business initially using only your existing resource. This can mean using your own savings or even getting a loan from your family members to kick-start your company.
The main benefit of bootstrapping is having 100 per cent control over all business decisions and direction.
On the other hand, you have to accept that there’s a good chance that your company will not grow as quickly as those that have access to external financing such as SME loans or venture capital funding.
Your financing options are not limited to only banks and investment institutions. Other than traditional bank loans or bootstrapping, there are many other creative options to get funding.
Below are 8 creative alternative funding options which provide companies with ample financing options.
1. Finance leasing
A finance lease is usually used to finance acquisition of equipment or machinery. There are commonly two types of finance leasing: Direct financing lease and sale-leaseback.
Lessee applies for a finance leasing to the lessor:
After due diligence and credit underwriting based on the lessee’s equipment purchasing plan, the lessor approves the application, signs the finance lease with lessee, sets up contract terms and clauses such as instalment plans, interests, duration, as well as default clause.
After the lease agreement is signed, the equipment seller delivers the equipment, installation and completes commissioning (if required). Lessor will make remaining payment after the lessee confirms the delivery.
Lessee will service the installment according to lease agreement and has all rights to use and operate the asset for the discharge of it’s business. The lessor holds the ownership of the equipment until lease installments are fully paid.
Once all installments are fully paid and the lease expires, the lessor transfer the ownership of the equipment to the lessee and terminate the lease. In certain lease arrangement, the lessor might still retain ownership of the equipment after end of lease.
A sale-leaseback is an arrangement where the lessee sells an asset to the lessor, and then lease it from the lessor. Once the lease expires, the ownership of the asset would be transferred back to the lessee.
Comparing to direct lease, the advantage of a sale-leaseback is that the lessee will have access to cash flow without affecting the production or operation of the company.
Finance leasing provides lessees with faster financing than bank loans, with typically less stringent requirements on credit assessment and guarantees for the lesser, which is ideal for SMEs.
2. Credit card financing/personal loans
Yes, most business owners would not link the use of credit card as a form of alternative business \. This used to be true as most business expenses are not payable via credit cards.
However, there are now solution that allows credit cards to be used for payments of business expenses. Fintech startups like Cardup allows businesses to use underutilized credit limit on either personal or corporate credit cards to pay for business expenses such as rental, suppliers payments and even staff salaries.
Payments to suppliers can be paid using credit cards even if suppliers don’t accept credit card payments. Cardup has an unique proposition that business users can tap on by charging your credit card upfront on the invoiced amount of purchases from suppliers.
They will then pay direct to your listed suppliers and you are billed the payable amount only when you receive your credit card statement.
SMEs whom use Cardup’s solution can tap onto the underutilized limit in personal or corporate credit cards to make payments for business costs like payroll and rental which are usually not able to be financed via traditional revolving bank credit facilities like trade .
It’s also a smart way to book company expenses under credit cards to earn card issuing bank’s reward points, cash back or miles. With up to 55 days interest free period from point of card debiting to statement due date, companies can enjoy some credit terms from such payment arrangement.
3. Equity Pledge
If a company is faced with a situation where it has no assets to pledge as collateral to lenders, but requires capital for CAPEX to expand production. When a company can’t obtain a loan with asset nor credit, but doesn’t want to sell equities, stock pledge is an option worth considering.
Stock pledge refers to the transfer of stocks against a debt, in order to obtain funds from lenders. This type of has a higher requirement for the liquidity and pricing level of equity, therefore is more commonly used by public companies.
However, SMEs can also copy the model, using equity as a guarantee to obtain a loan or production equipment to expand the business and overcome capital shortage.
Company A lacks the production equipment or cashflow for the operation of the company, so it proposes a stock pledge plan to capital provider, company B, asking for funding to purchase production equipment for production;
After a negotiation, it is agreed upon that company A pledges a certain portion of stock (15%, for example), company B provides company A with 10 sets of production equipment, each set of equipment costs $500,000, the total amount of the loan is $5 million, inclusive of interest.
Company A pledges 15% of its equity to company B, and it is agreed upon that company A will repay the loan in two instalments, $250,000 each, redeeming 5% of the equity.
After a two-year term, the loan is paid off in full, company A redeems 10% of its equity back, and company B continues to hold 5% of company A as a shareholder.
The implementation of this type of requires specific conditions. For example, company B must be confident in company A’s outlook and it’s business valuation. Through careful design and negotiation, equity pledge could be a brilliant method for more mature and larger companies with proven track record to overcome a company’s capital shortage.
4. Mezzanine Financing: A hybrid of Debt and Equity Financing
Mezzanine financing is an innovation in the capital market, with characteristics similar to both debt and equity financing, its risk and return level is between equity and preferred debt.
A mezzanine plan can be customized based on the needs of the company seeking capital, the ratio of debt and equity is very flexible, which helps companies restructure their capital. Common mezzanine includes preferred stock and convertible bond. Mezzanine is a popular financing option in pre-IPO .
There is an average of 20-month wait after a company files for IPO; during which, many events may take place, such as a bear market, drop in valuation of the company, or a less-than-ideal IPO price.
The company can choose to conduct a round first, and mezzanine would be a good choice. On one hand, it fixes the problem of a capital shortage, on another, it can improve the financial structure of the company. Furthermore, the fund raised can also prove that the company’s outlook is optimistic, and therefore be valued higher.
Project financing
Project finance is the financing that is backed by the assets from a specific project, and paid back from the cash flow generated by the project. Both BOT (Build–operate–transfer) and PPP (public-private partnerships) are forms of project financing.
The advantage is that it can attract investors with the stable, estimated future cashflow with no need to pledge assets as collateral.
Project financing is generally used for financing large-scale infrastructure projects such as highways, airports and power plants. Certain banks do offer project financing to SMEs as well for smaller scale construction and real estate projects.
Larger scale project financing can also be funded by several financial institutions as a syndicated loan.
Leasing vs. Buying
This section compares leasing with buying a car, outlining the financial and practical differences between the two options. Leasing may offer lower monthly payments and the chance to drive a new car every few years while buying might be more cost-effective in the long run if the vehicle is kept for many years.
Dealer Financing
Dealer financing is examined, highlighting how some car dealerships provide financing options directly to buyers. This part discusses the potential benefits, such as special financing rates and incentives.
Dealer financing is a popular option where car dealerships offer financing directly to buyers. One of the main advantages of dealer financing is the convenience of handling both the purchase and financing in one location. Dealers often provide special financing rates, such as low-interest offers or zero-percent financing, to incentivize buyers, especially for new cars. Additionally, dealerships sometimes offer promotions like cash rebates or deferred payment plans, making this a potentially attractive option for buyers who qualify. However, it’s important to compare these offers with other financing options to ensure the best deal.
Personal Loans for Car Purchases
The article discusses the viability of using personal loans for car purchases, particularly when buying from private sellers or when other financing options are not favorable. The flexibility of personal loans is contrasted with their typically higher interest rates compared to specialized loans.
The Role of Credit Scores in Car Financing
The impact of credit scores on car financing options is explored, emphasizing how a higher credit score can lead to better interest rates and more favorable loan terms. Tips on how to improve one’s credit score before applying for a loan to secure the best possible terms are provided.
Conclusion
Concludes by stressing the importance of carefully considering all available car financing options. It encourages potential buyers to thoroughly research and compare these options to find the best fit for their financial situation and car ownership goals.
In conclusion, it is crucial for car buyers to carefully evaluate all available financing options before making a decision. Factors like interest rates, loan terms, down payments, and the buyer’s credit score can significantly impact the overall cost of the vehicle. By conducting thorough research and comparing offers from different lenders, potential buyers can identify the financing plan that best aligns with their budget and long-term ownership goals. Taking the time to explore these options ensures more informed choices, reducing financial strain and promoting a smoother car ownership experience.
