Deal in focus: SEP drives car financing deal

Alice Murray
13 February 2014

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Scottish Equity Partnersт (SEP) ТЃ8m investment in Car Loan 4U picks up on the growing need for online consumer finance as well as increased demand for cars in the UK.

In early-February, SEP invested £8m of growth capital in Macclesfield-based Car Loan 4U, an online car finance provider.

SEP partner Andrew Davison first came into contact with the company after discussing increased deal activity in Manchester with a contact at corporate finance house GP Bullhound. The pair arranged a day trip to the city for Davison to meet a handful of tech firms and Car Loan 4U stood out as an attractive investment prospect.

When the company was ready to raise finance, GP Bullhound ran a process. However, having already met management in person, and having introduced the team to relevant SEP portfolio companies, including SkyScanner, the venture house was well-placed to secure the deal despite the competition.

Car Loan 4U flagged several of SEP's investment criteria, namely its focus on consumer internet, as these companies are scalable and capital-efficient.

Another attractive feature was that it had been self-financed prior to SEP's involvement. As well as growing revenues to £11m, the company had reached profitability.

From a wider perspective, Car Loan 4U benefits from several market trends. First, car sales, and particularly sales of used cars (which the company focuses on) have rebounded recently. In the UK, average car sales have come in at around nine million each year, of which seven million are used cars. In 2009, used car sales dropped to 6.3 million but recovered to a healthy 7.1 million in 2012. Figures for 2013 are expected to have increased as consumer confidence improves.

While obtaining car insurance is fast-becoming an online activity, only 1-2% of car financing is secured online. Car Loan 4U is the largest processor of online car financing, with plenty of room to grow as consumers increasingly look online for all car-related matters.

Wonga woes
Last year saw a tidal wave of criticism for venture backed pay-day lenders. That said, Car Loan 4U is hoping it can side-step any investor fears over the company's ethics. First, all applicants are credit-checked before they can proceed with the loan. Second, the loan is supplied on a long-term basis, typically between two to three years. Third, funds are transferred directly from the loan provider to the car dealer, so unlike a personal loan from a bank where the borrower states where the cash will be spent but in reality could spend it as they wish, this loan can only be used for buying a car. Finally, the loan is automatically secured against the car itself.

Furthermore, the rates offered by Car Loan 4U are far more reasonable than a personal loan – the car loan typically carries a rate of 4.9%, whereas a personal loan is around 10-12%.

SEP has already begun a recruitment process for the company. "On the executive side, we're looking to support the existing management team," says Davison. "We now have a shortlist for CTO and a long-list for a head of marketing. We want to bring in people from larger companies who have experience of high growth and expansion who can help drive Car Loan 4U through its next phase of development."

SEP will also support the company in building up its tech team: "A lot of the company's processes are already automated but the near-term objective is full automation. We want to make the consumer journey as easy as possible so that the entire process can be done online," says Davison.