Example 10

This example covers the topic of 0% and low-interest finance schemes from the perspective of a 0% finance lender. Examples 11 and 12 cover the same topic with slight variations from the perspective of a cash buyer seeking a discount, and a borrower wanting to use a 3rd party lender.

0% finance profiles can be characterised as containing disclosed and non-disclosed cash flows.

• The disclosed cash flows, which a borrower is aware of, are the full retail cost (advance) of the financed item and the payment cash flows which contain principal only; the sum of payment cash flows equals the item cost (advance), hence 0% interest.
• The non-disclosed cash flows are the direct transactions between supplier and lender, usually a cash discount to offset the financing costs of the lender.

This example, and the next two, should be informative for all users. The diagram below visualises the cash flow dynamics:

Example Calculation Inputs

• Advance: The full retail cost of the financed goods is shown as a blue downward arrow at the start of the timeline.
• Payments: The known borrower payments are represented by blue upward arrows. The supplier discount required to offset the financing costs is shown by a red upward arrow above the borrower’s upfront deposit at the start of the timeline.
• Interest Rate: Although not shown in the diagram, the rate should reflect the return required by the lender.

Benefits and Implications

• Mutual Benefits for Lender and Supplier:

  • New Lending Opportunities: For lenders, 0% finance deals are a way to expand their loan portfolio without directly charging interest to the borrower, instead getting compensated by the supplier.
  • Improved Stock Turnover: Suppliers benefit from quicker sales cycles as financing makes their products more attractive, reducing inventory holding costs.

• Marketing Strategy:

  • Competitive Edge: Offering 0% finance can be a significant marketing tool for both parties, attracting customers who might not purchase otherwise due to cost concerns.

• Cost Management:

  • Discount as Compensation: The supplier discount is essentially the cost of capital for the lender, which must be calculated to ensure the deal remains profitable for both parties.

• Customer Acquisition:

  • Lower Barrier to Purchase: By removing interest costs, these deals lower the entry barrier for customers, potentially increasing sales volume.

• Risk Management:

  • Credit Risk: Lenders might take on more risk since they’re not charging interest directly to the consumer, but they mitigate this through the discount from the supplier.
  • Supplier Risk: The supplier must ensure the discount doesn’t erode too much profit, balancing between sales volume and profit margin.

• Market Dynamics:

  • Pricing Strategy: This model can influence market pricing, where suppliers might adjust their list prices knowing discounts will be given to offset financing.

• Regulatory Considerations:

  • Disclosure: Both lenders and suppliers must navigate regulations regarding how such deals are advertised and disclosed to consumers to avoid misleading marketing.

• Financial Planning:

  • Cash Flow: Suppliers need to plan for the immediate cash outflow due to discounts, while lenders must manage the timing of their cash inflows from repayments.

• Consumer Perception:

  • Value Perception: The perception of getting “free” financing can lead to increased customer satisfaction and loyalty, even if the product’s list price might be adjusted to account for this.

This arrangement highlights a strategic partnership between suppliers and lenders, where careful calculation and transparency in undisclosed cash flows are crucial for maintaining a beneficial relationship while providing value to the end consumer.