An End To Bike Shop Finance?

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February 09, 2012, 05:37:53 AM

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[steveb]

From Real Cycles Blog www.realcycles.co.uk

An End To Bike Shop Finance?

If you’ve been into any bike shop in the last few years, or even visited their websites, you’ll have most likely seen the image above hanging somewhere. It’s there to tell you that in the shop you can buy your new bike and/or bits on finance.

When you avail’d of this service the shop didn’t lend you the money, they acted as the broker between you and the lender, Black Horse Finance. These guys are part of the Lloyds group and deal with the finance in over 90% of bike shops, and many many other types of shops on the high street too. Reality is if you’ve ever purchased anything on interest free or low rate finance from a shop, your a customer of Black Horse. From the end of next month, 26th Feb to be precise, Black Horse are pulling out. This means no more low rate or interest free finance in almost all bike shops.

The implications of this move are massive. As I said, Black Horse has massive market share, there are others obviously, much smaller with less competitive rates, but they do exists. But think about it, once Black Horse are gone, these other players are not going to put they’re rates down are they? Nope. The cost of this finance is going one way, up.

And when I talk of rates, I mean the costs of the finance to the shops. If you buy something on interest free you pay only the ticket price, this doesn’t mean the bank lending the money do it for free, no, of course not. They charge the shop a commission. In the instance of 24 months interest free it can be as much as 20% of the purchase price. Low rate finance, where the lender charges you the customer a low rate of interest also costs the shop. Yep, the lender still wants to make his 20% commission, so you pay a bit and the retailer pays the rest.

So, what does this mean to you? Well, put bluntly, your going to have to find the cash, or space on a credit card for your next big purchase. And not just bikes. This is going to have massive ramifications on the high street for everyone. Interest free finance is more or less going to disappear over night, and low rate I suspect won’t be as low rate as it is now. And don’t expect the banks to step in with interest free credit cards either. The cost of borrowing on cards is getting higher and higher every month. So, in short, if you ain’t got the cash, it’s gonna cost to borrow the money. A lot.

How will this effect the shops? It don’t take a genius to work out this is going to squeeze a lot of shops very hard. Until we stopped offering interest free finance back in the Summer (we had word this was coming so started preparing early for it) almost all our top end bikes were sold using this method. Once we switched from interest free to low rate our top end sales slipped, but we and or customers got used to it, so it’ll have little effect on us now. But lots of shops rely still on interest free finance to sell big ticket items even though the costs to them are so high (20% average), so the question “How will they survive come March?” has to be asked.

How will this effect us? Thankfully, not much, if at all. We more or less stopped interest free in the Summer when the rates went thru the roof, we moved over to low rate finance instead. Presently you can buy anything over £150 from us at 9.9% APR, which on a £2000 will cost you £100pa in interest, so it’s not really that expensive. Best of all you can spread the cost over 36 months, something you could never do with interest free (max was normally 24). Until 26th Feb we’re still doing this business with Black Horse, but once they turn the tap off we’ll have another lender in place and whilst the interest rate might go up a bit, it won’t be by much, we hope!

As a fail safe though, if your thinking of a big ticket purchase soon, we suggest getting in now. Other lenders are waiting in the wings to take over the Black Horse business, but as yet we’ve no idea on the rates, and more over the acceptance levels. That is, how many applications actually get approved. Experience has taught us that few offer levels like Black Horse  did (average 85%), most hover around the 50% mark. So, as I say, get in now, or you might end up having to save up for that next big new bit of bling.

[Steve UK]

So they pretty much have had the market to themselves and they are withdrawing  

They were approving 85% whilst everyone else was 50% this sounds like its all gone a bit wrong for them, I wonder how many are defaulting on these unsecured loans?

This to me is another sign that things are going to get a lot lot worse in the near future.

This is just my take, I am no finance wiz just someone who has an eye on the UK's money problems. We keep getting told the recession is over and we are on the road to recovery. QE in my opinion has only masked the problems and worse is to come...

Dead Cat and Bounce is something I heard 12 months ago and this may just be the case.

Steve

edit: Good call Steve on being ahead of the game

[steveb]

I'm not sure they've suffered higher defaulting than others, I think they're higher approval rate is more to do with the available funds and infrastructure they had, but ultimately I suspect it's the cost of this infrastructure that has led to the withdrawal from the market.

Retail finance must I'm sure be very labour intensive for a small return. if you've got £50k to lend, are you going to lend £1k to 50 people or £50k to 1 person? Personally I'd go with the latter. Yes, your going to run into the "eggs in one basket" syndrome, but the cost of arranging one load, opposed to 50, must be much more attractive, and cost effective.

Rates from BH went thru the roof in Summer 09, I had a chat with my contact there and it was obvious they were trying to off load a lot of their business. When we started interest free 24months cost me less than 10%, now it's near 20%. As a result we dropped interest free, so did lots: My wife went out to buy us a new bed in Sept, couldn't get interest free anywhere, a year earlier it was being thrown at us (but we didn't get round to sorting it. D'oh!). I'm guessing once these rates went up, so much business dropped off it was no longer worth continuing.

I think the way this will pan out is finance will still be available, but thru a much smaller number of shops, and it certainly won't be free. As said in the article, we've been offering low rate for 6 months now, and whilst it's obviously not been as popular, and there is no doubt we've lost sales as other shops have continued to offer interest (how the hell they can afford the commission though is beyond me. Do they actually understand the real costs I wonder?) in the last few months more and more are accepting finance now costs so have been using it without a problem. So, as you say, hopefully we're slightly ahead of the curve on this one.

But, only time will tell. A new player, or the existing ones might step in and pick up the business on the same terms as Black horse. But my instinct is they're all now sitting there thinking "if BH have got out, maybe we should consider the same?", and the only way they're going to stay is if they make a lot more profit. Which means higher cost of borrowing.

[tank_rider]

My thoughts on this are that it's actually a good thing as we now own such a large chunk of the UK banks (Lloyds included I believe) and so ensuring the business is as lean and able to survive any further drop in the economy gets my vote.  I know it isn't going to help the retail sector, however if it means that there is less bad debt around then that is an improvement.  There's always the old fashioned way of borrowing money, through your bank, after all they know your finances pretty well and can make the most informed decision so not to end up with problems.

[steveb]

Or, the really really old fashion way of doing it: Save up first!

[Steve UK]

Or, the really really old fashion way of doing it: Save up first!

Totally agree, back to basics. I got rid of my credit cards about 5 years ago now, one of my better decisions.

Steve

[domino0]

Totally agree, back to basics. I got rid of my credit cards about 5 years ago now, one of my better decisions.

Steve

Are you actually being serious, every single card?

[steveb]

I've not had a credit card for years. No need for them in this day and age. Unless you need to borrow on them, and it's about the most expensive way to borrow. Well, I did have a card for a while last year.

About a year ago I got a call from a bank offering me a card with a £15k limit. I thought, why not, you never know, so applied and got it. When it arrived I had to phone up to get it activated. Guy on the other end of the phone was desperately trying to sell me insurance. I declined. he said, well, we're a responsible lender, and what if you lose your job, how will you pay your card off? I said I was only getting a card in case I lost my job, in which case I'll be maxing it out with no plan to repay them. He didn't really know what to say, but activated it all the same!

Some months later a statement came thru with a £15 charge on it, from the credit card company, it was because I'd not used the card. I sent it back to them and told them they'd have to take me to court for the £15, never did hear anything.

[Steve UK]

Are you actually being serious, every single card?

Yep, as SteveB says its the most expensive way of borrowing.

I just stopped buying stuff I did not have the money for, only when I had the money in my current account would I buy stuff.

Steve

[cramaj]

This country and the world in general is in its current state for a few complex reason to do with securitisation of debt that I won't go into.

If we take this securitisation back a step or two you get back to the man on the street, with his average job, his average salary, two kids, two cars, a mortgage and a wife that probably works part time. This average man on his average salary wants to have two new cars in the drive, he wants his kids to have all the latest gear and gismos, he wants his wife to dress well and he wants to live in a house that will make his parents proud and make his friends envy him. He wants to buy things like T.V's, bikes, sofas, clothes, food even but he does not have sufficient disposable income to buy them. This is because he has an interest only mortgage that he can't afford, two new cars that are financed that he can't afford and two kids that he can't afford. But bugger the fact that he can't afford them he'll just put them on the never never, hell he'll even borrow money out of his house and pay for that sofa or that bike over the next 20 years......................Great, but its not really great now is it.  

Basically the man in the street, combined with the lenders facilitating it, has went mad. Remember your parents and grandparents how they had to save up to buy things...whats that all about, save I hear you say!!!! But I want it now or I'm bloody well going to chuck my toys out the pram.................

Think of it this way, your parents and grandparents would never admit to their friends or relations, or you, that they had purchased something on tick. Nowadays people boast about what colour of card they have and how much credit they can get on it. This is fundamentally wrong and it will take a few generations, who are committed to change, to divert away from the buy now pay later philosophy.

So with this in mind, a/ look at the prices of bikes this year - mental. Who the hell has sufficient disposable income to spend £3-4K on a push bike? God knows how you are going to sell those higher end bikes this year Steve.  b/ W shaped recession - watch out its probably coming c/ Steve I want a DH bike but it costs £3,199. I have the cash but Christ its a lot of money for a bike I'll use 5 - 10 times a year. You currently offer 10% off and previously offered 15% off. Any chance of getting that 20%???

[iain1775]

Yep, as SteveB says its the most expensive way of borrowing.

I just stopped buying stuff I did not have the money for, only when I had the money in my current account would I buy stuff.

Steve

Same here
I have 1 credit card, I use it all the time but always pay it off in full every month so never pay any interest
Only reason I use that is cause I pay for alot of diesel for work milage and expenses that I claim back so credit card means I get money of work before I shell out at end of month
That and that I get points off it and may as well get something out of them
Last Christmas we used points from all our various cards and saving schemes and got £450 off a f*ck off big HD telly

The UK is in a really sick state with people owing money they will never afford to pay back. Its about time things got harder to be honest, people have had credit far too easily in the past

[steveb]

This country and the world in general is in its current state for a few complex reason to do with securitisation of debt that I won't go into.

If we take this securitisation back a step or two you get back to the man on the street, with his average job, his average salary, two kids, two cars, a mortgage and a wife that probably works part time. This average man on his average salary wants to have two new cars in the drive, he wants his kids to have all the latest gear and gismos, he wants his wife to dress well and he wants to live in a house that will make his parents proud and make his friends envy him. He wants to buy things like T.V's, bikes, sofas, clothes, food even but he does not have sufficient disposable income to buy them. This is because he has an interest only mortgage that he can't afford, two new cars that are financed that he can't afford and two kids that he can't afford. But bugger the fact that he can't afford them he'll just put them on the never never, hell he'll even borrow money out of his house and pay for that sofa or that bike over the next 20 years......................Great, but its not really great now is it.  

Basically the man in the street, combined with the lenders facilitating it, has went mad. Remember your parents and grandparents how they had to save up to buy things...whats that all about, save I hear you say!!!! But I want it now or I'm bloody well going to chuck my toys out the pram.................

Think of it this way, your parents and grandparents would never admit to their friends or relations, or you, that they had purchased something on tick. Nowadays people boast about what colour of card they have and how much credit they can get on it. This is fundamentally wrong and it will take a few generations, who are committed to change, to divert away from the buy now pay later philosophy.

So with this in mind, a/ look at the prices of bikes this year - mental. Who the hell has sufficient disposable income to spend £3-4K on a push bike? God knows how you are going to sell those higher end bikes this year Steve.  b/ W shaped recession - watch out its probably coming c/ Steve I want a DH bike but it costs £3,199. I have the cash but Christ its a lot of money for a bike I'll use 5 - 10 times a year. You currently offer 10% off and previously offered 15% off. Any chance of getting that 20%???

Good post. I agree in part. In eply, I'll start at the bottom..

20% off? Never during the season. Perhaps at the end, but we're much leaner now on stock holding, so that's unlikely. But never say never.

15% off? Yep, over Christmas, when we're closed. We do it every year. I figure, we're closed, so whatever we can pick up is bonus as we don't budget for any sales at all over the period. Why close? Me and my staff work to live not the other way round. I don't buy into the modern retail bollox where we must be open every minute of the day to satisfy customer demand. Me and my staff come first at holiday times, experience has proven my customer respect this.

10% Off? Lets face it, we all know any shop will give you that, so promoting it for a weekend here and there just focus's the mind. Selling a bike on finance costs me 10%, so I figure at times when we're quiet (like now) why not offer that back to the customer who is willing to pay in full.

Saying all that, these discounts are via vouchers not straight discounting on the site, that I rarely do, and you'd be amazed how few bother to read our mailshots to pick up the codes. This weekend we had a lot of online sales, less than 50% used the 20% off code!

Now, the first point you raised.

I think you've been listening to the news and media too much. I don't believe that as a population we're in as much individual dept as we're told. I think it's more a case of a small minority with massive dept, opposed everyone with too much. And I think it's an age thing too. Under 30's are too easy with debt, over 30's less so. I recall the late 80's, I was in my twenties then and exactly the same thing happened then as now, everyone supposedly ran up debts they couldn't afford. I know I did. Bearing this in mind, and the fact the general population are getting older, I think there is a lot less unaffordable debt out there than some would have us believe. But what's the alternative? Admit the banking business model over the last 20 years has failed and it's now up to it's eyes itself with debtors who are paying a tiny fraction of the real costs to borrow money?

Society in general is healthy, and safe, and largely happy. But a society in that condition is really hard to manage, much easier to manage a society that is in fear, so the government and it's PR dept, known as the BBC, are doing everything in it's power to convince us we're constantly on the verge of a big disaster. Just look at the recent fuzz over the snow. Listen to the news and you'll be convinced you'll die if you venture outside, and only the government can save us from imminent death . This "politics of fear" starts young.The HSE is the governments biggest weapon to convince us there is danger at every corner, if it snows they tell our children it's too dangerous to go out to play at school break time if it's remotely icey or snowy so the kids stay inside and watch TV. They tell us riding a bike is so dangerous you really shouldn't do it without wearing protective equipment. They tell us all sorts of nonsense, but with the government and their PR dept constantly re-enforcing the message, sooner or later it sinks in. Brain washing anyone?

And finally, the cost of bikes. Yep, mental. Totally mental. I refuse to stock the silly money stuff now. Last year our most expensive bike was £6k, this year it's about £3.5k, and they don't really sell much. Last year our cheapest bikes was £1500, this year it's £250. Why are bikes so expensive? Lots of reasons. Transporting them half way around the planet is one of the main costs. Costs of material has minimal impact on the end price. Cost of borrow the money to pay for everything in the supply chain is another biggie too. But the main reason is you guys. Sorry, but that's the reality. You want it now, in the size you need, ideally in the colour you like, you want it to change each year, and your not willing to wait for any of this. The cost of cars has plummeted in the last ten years, but you try walking into a showroom and waling out with even a cheap car, it won't happen. You have to order it, and wait, upto 3 months. With bikes you want to walk in, get a good price, and walk out with it. This means I need a good margin in the first place to be able to offer you a good discount. I need a huge stock holding, I need to pay for space to store these bikes, and I need to pay for financing for when you want it on the never never. Then come June you'll be wanting huge discounts as it's the end of the season, and no one pays full RRP at this time of year. Likewise my suppliers need to also carry massive stocks, with no idea if they'll sell them. And when they don't sell them they'll have to clear them out at cost price to make space and money for the next seasons range.

If I was able to just carry display/demo models, have customers wait 7-14 days for the bike to arrive after being ordered and know I was always going to get the RRP, these RRP's could be reduced a lot, I wouldn't have to have £100k a year tided up in stock, I wouldn't have to pay £10k a year for a warehouse, and maybe, just maybe, I could order direct from source, so cutting out the local importers, so immediately knocking 20-30% off the RRP in one hit.

And herein lies the problem, as I see it. We have been brainwashed into a "I want it now, and I want it cheap" mentality. I think by the supermarkets. NO ONE is happy to pay the price asked, everyone wants a bargain, regardless of the implications. Anyone Who attempts to charge the full price is considered a rip off merchant. No one is willing to wait for their new toys. This is where all the problems in the supply chain, and possibly society start. IMO.

And please don't think all this is aimed at anyone individual, it's not. It's just my views, from a member of the publics POV, not from a bike shop owners POV. And my comments are made in the wider context that this thread is now addressing, not just about bikes and stuff, which in the big scheme of things, is not really very important!

[fly6154]

I have never ever owned a credit card,Pay for everything cash just save and do it that way.So it doers not bother me at all.

[100mphplus]

I save for things but also have a CC, one of those that gives you cash back, (i get 2.5% back off every transactions in a single refund cheque every year) and it gets paid off every month, so I never pay any charges for it and get everything I buy 2.5% cheaper too

If you get the right one and use it sensibly, they are an asset.

[cramaj]

Good post Steve and do agree with much of what you say which largely mirrors my own views.

Not been listening to too much telly. Runs a little deeper than that. But don't want to go into that on this forum.

Headline news today in Scotland - "Too many Scots paying their Mortage on credit cards" (thats right their mortgage). Nuts.

Blame Joe Bloggs and blame the banks. Tell me, what has 4, 5 , 6 & even 7 times salary got to do with mortgage affordability? - bugger all thats what. The only thing that matters is your income and expenditure. This is what drives affordability. When I were a lad it was 2.5 times joint salary, over the last 10 years we have been at 5 - 6 times salary. This can work, but only if you don't have car loans,  kids or any other form of debt. Oh and remember these are interest only mortgages, we  now rent from financial organisations rather then the council!!! Progress?

In simple terms the West's people need to save and the West's economies need you to keep spending. Rock & a hardplace / catch 22?

With regard bikes on tick. Fine as long as it is affordable and doesn't mean you can't feed the kids. However I bet the majority who take the smaller things on tick - sofas, TV's, bikes etc have little or no savings.

As you say I want it and I want it with whistles and I want it yesterday. As I say, it will take generations to fix this attitude.

PS your business ethos and principals are spot on. Nothing matters more than quality of life.