Working for yourself as a taxi driver, or setting up a taxi driving business, can be a great way to put your skills to work. As a driver, you may be responsible for the maintenance and finance of your own personal vehicle, in which case you’ll need to ensure that a comprehensive finance plan is put in place that allows you the security and flexibility you need. Choosing a taxi finance solution which works for you can be tricky, since there are so many options on offer; there are plenty of companies offering different variations and it’s often hard to know where to turn.
Understanding the basics of what taxi finance is and how it works is important before you begin shopping around for a long-term plan. There are many variations of the standard hire-purchase agreement, some of which are suitable for individual drivers and some which are best suited to taxi companies; knowing the difference and which one is best for you is vital, because the wrong type of finance plan can cause issues for cash flow and profitability.
What is Asset Finance?
Asset finance is a way for a business to operate beyond the constraints of its cash flow. The way it works is fairly straightforward; a business already owns one vehicle, and wishes to expand its fleet to two. As a small company, it doesn’t have the cash on hand to buy a new vehicle, nor does it have enough to put down a deposit on one; it needs the cash it generates to keep the company running and pay wages. Instead, the business turns to an asset finance specialist, who designs a plan to suit their particular circumstances.
The exact details of how the deal is worked out vary across the industry, and many lenders operate differently to cater to different clients, but the basic premise is that the lender supplies a loan in return for security against the company’s existing assets. In this case, the borrowing company uses their new vehicle as collateral for the loan – this means that if they should fail to repay the money they’re borrowing, the lender can seize their vehicle and sell it to recoup their loan. This provides the lender with some security, because they know that if their loan is defaulted on they’ll still be able to recoup their money by repossessing the borrower’s assets.
The thought of a lender being able to repossess your assets is a worrying one for many small business owners, but once the basic principles of asset finance are understood it’s easy to see why it’s such a valuable option. Small companies rarely have access to the sorts of capital that larger ones do, which often places a restriction on how quickly they can grow. The inability to apply for traditional mainstream finance means that these small businesses are hampered by their cash flow, and cannot expand quickly to take advantage of potential opportunities. Because asset finance allows them to use existing property to secure a loan, they can then leverage the assets they already own into growing their business.
Of course, it’s vitally important when choosing an asset finance solution that the business selects a plan that works for them. Like any loan, asset finance payments include interest, and if this is beyond the company’s spending power the cost of financing the loan might prove too much. Therefore, an asset finance plan is only an acceptable solution if it doesn’t incur unachievably high monthly fees, and allows the borrowing business to expand into more profitable areas.
The Changing Face of Asset Finance
Asset finance used to be thought of as a “last resort” for businesses which had no other options. This was because a business which had to use their assets as collateral had nothing else to use; no balance sheet or accounts payable which would usually be used to secure a loan. It could also be seen as a sign of poor credit history; because an asset has a concrete value, it doesn’t matter to the borrower how creditworthy the borrower is. If they know they can seize and sell the borrower’s assets to recoup their loan, they’re much happier to approve a loan for someone without a good credit rating. Therefore, asset finance suffered from association with large businesses in dire straits; a failing business might be forced to fall back on asset finance because it could no longer secure mainstream loans.
A lack of credit history or a relatively thin balance book doesn’t necessarily point to a business in a bad situation, though. In fact, many small businesses which are growing quickly have little in the way of credit history, and often plough all their earnings back into the company, resulting in a relatively low profit (or even a loss). In these situations, asset finance can be an excellent tool, and one which is perfectly suited to the job. Small, fast-growing businesses typically aren’t able to secure funding from mainstream sources, which require their clients to fit a certain set of criteria; generally, they wish to lend to businesses who have a proven track record. A business can’t grow quickly without financial backing, though, and start-ups need some way to finance their expansion.
Here is where asset finance proves invaluable; these small businesses might not have a track record, but they do often have securable assets such as vehicles, machinery or premises. These can be used as collateral for a loan, which is then used to expand the business by investing in new assets, new personnel or new materials. Because the loan is backed with the security of an asset, the lender is able to make the loan in confidence, because if things should go wrong and the borrower should fail to repay, they’ll have the option of selling off the collateral.
Asset finance has become a much more popular tool in recent years for precisely this reason, because it allows small businesses and start-ups to expand quickly and securely. The growing demand for this type of finance has made the asset finance marketplace more competitive, which means that consumers have greater choice and lenders are forced to make their products more attractive.
Types of Asset Finance
As mentioned previously, there is not one single “one size fits all” type of asset finance. The many different businesses which rely on asset finance to expand and grow all have different needs, which have led to the development of many different variations on the basic concept of asset finance. We’ll look at some of the most popular types below, along with the ways in which they would typically be employed.
Hire purchase is one of the most common forms of finance, and is the typical “pay in instalments” plan offered on many high-ticket items. This form of finance allows the borrower to buy the asset upfront with the money from their loan, then repay the loan over the course of a set term. During the course of this term the borrower will make regular contributions to the cost of the loan, paying off both the capital and the interest on the loan. Until the full amount of the loan is repaid, the lender will own the car in full, meaning that the borrower isn’t free to sell or modify the car without their permission; therefore, you’ll need to ensure that your loan provider is happy for you to use the vehicle as a taxi.
The loan is secured against the vehicle itself, so if the borrower should fail to keep up with repayments they could find their car being repossessed by the lender. Bear in mind that although it can make owning a car more achievable in the short term, it’s usually more expensive to buy a car through hire purchase, since you’ll have to pay interest on the loan throughout the term. At the end of the term, there’s also an “option to purchase” fee, which must be paid if you wish to take on ownership of the car – plan ahead for this.
In many ways, lease purchase is similar to the principle of a hire purchase agreement. However, there are some subtle differences which can make it more appropriate for different types of customer. The key point is that the cost of the loan is worked out according to the value of the car, and how it changes over time. In essence, the loan is provided to you with a contract to purchase the car at the end of the lease period, at whatever the market value is at the time. During the course of the lease, you’ll make regular payments to offset the vehicle’s depreciation, so the less the car depreciates, the less you’ll have to pay; this is why lease purchase is often used to finance vehicles which won’t lose a lot of value, such as high-value and luxury cars. For upmarket taxi drivers, this can be an excellent way to generate extra income.
Lease purchase allows the borrower to offset the main payment against the vehicle until the end of the loan term, in what is known as a “balloon payment”. This means that the actual cost of buying the car is deferred until the end of the loan, allowing the borrower time to save up and reducing their monthly costs during the loan period. However, since there is no option not to buy the car, the borrower must ensure that they are able to meet this cost when the time comes. This makes lease purchase a good option for businesses who want to own their vehicles outright, rather than own them for a set period of time.
A finance lease works in a slightly different way to the two methods we’ve just looked at. Rather than providing funds for the borrower to purchase the asset, a finance lease is where the lender doesn’t provide any finance at all; instead, they purchase the asset themselves, and then rent it to the borrower. This rent can either be configured to repay part of the vehicle’s value, or to pay interest on the value of the asset, and at the end of the term period the asset can be treated in one of several different ways, depending on the agreement.
Firstly, the asset might be sold by the lender, and the funds used as to provide a rebate for the borrower. This allows the lender to ensure that their costs are covered, and also offers the borrower the possibility of recouping some of their costs. Alternatively, the borrower might be given the option to sell the vehicle themselves, or to take on ownership of it. In this case, they might be expected to repay a small percentage of the sale vale to the lender.
Driver to Driver Finance
Driver to driver finance works in a similar way to regular hire purchase or lease purchase agreements, but allows taxi drivers to buy vehicles from their contemporaries around the country. This presents several advantages over purchasing directly from a manufacturer, or from a taxi firm: taxis which have been well-used are likely to be offered at a discount, but these vehicles often benefit from a good service history. Many taxi drivers, especially those who work for a firm, have no incentive to skimp on service costs; if their vehicle suffers a breakdown, they’ll lose business, so any issues must be resolved quickly and to a high standard. In addition, mechanic fees can often be offset against tax income, so taxi drivers will often have any potential problems fixed as soon as they arise.
The financial arrangement in this form of purchase often functions in a similar way to a hire purchase policy, with the difference that ownership of the vehicle remains with the original owner until the loan is fully repaid. This can offer taxi operators a cheap and effective way to expand their fleet without having to pay high upfront costs, and with the ability to spread their investment over a period of several years.
What Will You Need to Apply for Taxi Finance?
Taxi finance is a specialised form of asset finance, and the main criteria for taking out a loan still apply to this form of funding. The basic information you’ll need is your personal details and residential history (most companies require 3-5 years of addresses). You’ll also need to provide details of your current employer, so that the lender can ascertain how secure you are as a client.
In order to obtain finance, you’ll also have to supply details of the vehicle you intend to purchase, as this forms the basis of your security for the loan. The lender will need to know extensive information regarding its condition, value and likely depreciation, so you’ll need to supply as many details as you can. It’s possible that you’ll also need to present the vehicle for examination, if you’re buying a used car, in which case there might be additional expenses involved.
In addition to these requirements, you’ll also need to pass a credit check. Because asset finance is a form of secured lending, the credit history of the borrower has less of an impact on the likelihood of approval. However, a poor credit history still has the potential to increase the cost of the finance policy. Even though the lender has the option to repossess and sell the vehicle, this is only an action of last resort, and they’d rather keep to the specified payment plan. Remember, the most important part of your credit history is the 12 months leading up to your application; though “black marks” in your history can have an impact, the more recent they are the more they’ll concern a lender.
As with any form of finance, your lender will generally view multiple applications for credit as a negative sign, which is why it can be so difficult for small businesses to secure mainstream funding; they’re often already borrowing heavily simply to get off the ground. This is another reason why secured asset finance presents a useful tool for small businesses and sole traders, because it presents an avenue through which secure financing can be achieved.
Taxi Finance – Can it Help You?
As we’ve seen, the option to take out a taxi finance policy can be extremely useful for growing businesses. However, although it may be a useful solution for some businesses, it isn’t necessarily right for others. Bear in mind that although the cost of the vehicle can be spread over several years, the total overall cost is usually higher than the upfront outright purchase price. In addition, some policies can be inflexible and require that you follow through with the purchase of a vehicle, which might not suit your situation further down the line. This is why it’s so important to understand the nature of taxi finance and how it can be best used before applying for it; it’s a useful tool, but not one which suits every driver.
Official resources about UK regulatory bodies:
- National Association of Commercial Finance Brokers (NACFB)
- The Association Of Short Term Lenders (THEASTL)
- The Financial Conduct Authority (FCA)
- Bank of England Website
- Prudential Regulation Authority
- Financial Conduct Authority
- The Financial Policy Committee
- Financial Services Compensation Scheme
Other Unofficial Guides
Covering areas of UK regulation on and aspects of Taxi or Asset Finance.
Research provided by Bridging.com