0% Finance

[StevieL]

I guarantee that if we had this option in SA, we would all have better bikes (and a lot of debt...)

[GrumpyOldGuy]

Hmm, Yeah, money is too expensive in SA to allow businesses to do that easily.

 

The cost of money in the UK is much lower than here and Evans wont carry the finance anyway, its sold to a specialist finance house who pays them on presentation of the invoice less a predetermined %, and they in turn collect the monthly installment from you.

 

So in effect EVANS is still getting cash for their sale, albeit invoice value less a certain % which gos to the finance house.

 

Sometimes its worthwhile for a business to take less profit and clear excess stock or stimulate sales a bit, in which case this is a great method.

 

As an example, I used to buy componants from a very big supplier in Germany, they would never offer more than a 2% discount for cash simply because the low cost of money for them meant that it was more worthwhile for them to wait 90 days for their full invoice value, than to give a bigger cash discount.

 

SA's high cost of money makes this impossible though.

[andydude]

If they normally charge 5% for £1,000 it "only" comes to £50 a year - so basically they're giving a discount of £50 by charging 0%, but the risk of no payment is carried by die finance house/underwriter - which doesn't really make sense for the finance house - think about it: would you lend somebody £1,000 and expect no interest and also take the risk of them not paying? Business plan makes no sense and it will probably not end well for Evans Cycles (I'm assuming they're taking the no-payment risk).

[Starry nights]

The risk of non-payment is probably much less in the UK than here - so will work for them?

[AndreZA]

If they normally charge 5% for £1,000 it "only" comes to £50 a year - so basically they're giving a discount of £50 by charging 0%

 

Their interest rate is only about 2-3% so £20-£30 discount is nothing.

[andydude]

In the UK: home loans around 5% and personal loans approximately 7 - 10%.

 

It's the same with the car financiers here where sometimes they give a discount on the interest rate (0%, 5%, etc.), but in reality it is a discount on the sale price, but spread over 3 - 5 years. They do this as they can't give a direct cash discount as this stuffs up the second hand market.

[GrumpyOldGuy]

If they normally charge 5% for £1,000 it "only" comes to £50 a year - so basically they're giving a discount of £50 by charging 0%, but the risk of no payment is carried by die finance house/underwriter - which doesn't really make sense for the finance house - think about it: would you lend somebody £1,000 and expect no interest and also take the risk of them not paying? Business plan makes no sense and it will probably not end well for Evans Cycles (I'm assuming they're taking the no-payment risk).

 

Not necessarily, its like any financial transaction, the finance house will effectively buy the sale at a discount from Evans, but it will be far more than 5%, usually closer to 15% or more, who will get paid by the finance house and his sale is completed, the finance house will then bear the risk.

 

However they will demand stringent credit checks on purchasers, and not everyone will qualify (actually I think few will qualify) so the finance house dosnt really have any extra risk than under a normal transaction.

 

Its a very normal financial transaction, its just that instead of the finance house buying the sale without a discount and charging interest, they buy the sale at an agreed discount which in effect covers their interest and profit, these transactions are also quite common here in SA as well, especially in the office machinery business.

[dirtrider]

did a bank in the US not try the same thing with home loans and made the rest of the world suffer for their stupidity ?

[GrumpyOldGuy]

did a bank in the US not try the same thing with home loans and made the rest of the world suffer for their stupidity ?

 

It was quite a few banks in the US.

 

It was similar I guess, but mainly what they did was grant "Ninja" loans (No income no Job assets)to people who really couldnt afford to repay.

 

The credit worthiness of the transaction was based mostly on the value of the property, but when the property market took a dive and people couldnt pay their morgages, the value of the property on the banks books was less than the value of the loan and the banks lost trillions.

[javadude]

It was quite a few banks in the US.

 

It was similar I guess, but mainly what they did was grant "Ninja" loans (No income no Job assets)to people who really couldnt afford to repay.

 

The credit worthiness of the transaction was based mostly on the value of the property, but when the property market took a dive and people couldnt pay their morgages, the value of the property on the banks books was less than the value of the loan and the banks lost trillions.

 

They also let those Ninja's refinance their homes based on bubble evaluations. They then used the whole loan book as surety on massively geared investments.

[Cassie]

Don't knock SA too much!! We came through the whole meltdown quite unscathed...compared to other countries...something must be right? not so?

[javadude]

What Grumpy explains is very similar to invoice factoring, where smaller companies struggle with cash flow when they sell goods to big companies that only pay over 90 days. An institution will buy a companies invoice book at less 5% but give payment up front, and will collect from the bigger companies at 90 days, making 5% priofit.

 

This way the smaller guys are guaranteed cash flow but make less profit.

[Guest Big H]

I amy be totally wrong but is this not part of a UK Government incentive to cycling where they subsidize the interest. I remember reading somewhere about a scheme like this in the UK a while ago.

[GrumpyOldGuy]

They also let those Ninja's refinance their homes based on bubble evaluations. They then used the whole loan book as surety on massively geared investments.

 

Yeah sure, the whole debacle was nothing more than greed, ......but,what always interest me is while the banks were making millions of dollars profit (and they were initially) nobody complained, because investors, employees, traders and managers were going home with fat wallets, everyone thought the bubble will never burst.!

 

But when it did, those same people were the first in line shouting about how the rules were bent.

 

Its like a pozi scheme, while everyone is making money its all fine and dandy, Bernie Maddoff made some people billionairs and many people millionairs, but when it crashed, then those same folks are screaming about how criminal it all was.

 

Human nature at its worst.

Edited December 14, 2010 by GrumpyOldGuy

[GrumpyOldGuy]

What Grumpy explains is very similar to invoice factoring, where smaller companies struggle with cash flow when they sell goods to big companies that only pay over 90 days. An institution will buy a companies invoice book at less 5% but give payment up front, and will collect from the bigger companies at 90 days, making 5% priofit.

 

This way the smaller guys are guaranteed cash flow but make less profit.

 

Sure, its a form of factoring.