The pros and cons of different dealer funding models

It used to be the case that cash was king when it came to car dealers purchasing new stock. However, with increasing pressures on finances and changing attitudes towards credit, dealers are increasingly weighing up a range of options when deciding how to fund the vehicles on their forecourt.

Options now include everything from using their own cash, sale or return, finance companies, bank loans, auction funding plans to bespoke stocking plans.

In order to help you make the right choice, let’s take a look at the various options out there.

Using your own cash:

The benefits of cash to a dealer are obvious. It offers readily accessible finance that is accepted everywhere and allows the dealer to own one hundred per cent of everything they purchase.

It’s only beneficial when cash is readily available. If it’s not, then buying power is massively restricted and along with the opportunity to grow the business. It may be that there are better ways to use your own cash than to have it tied up in stock.

Sale or return:

Another time-honoured route is to retail vehicles on behalf of their owners, on a sale or return basis. Importantly this requires no cost outlay, there is no hassle in sourcing vehicles and it allows the dealership to increase its stock on a limited budget.

The negatives often outweigh the positives: it’s a route that regularly depends on informal relationships, gives little or no choice on what stock arrives and the dealer must carry the risk of warranty and returns. Once you add in preparation costs on someone else’s vehicle, having to split the profits and the fact that a sale or return vehicle can be taken away at any time, you can see why this quickly becomes a far less attractive proposition.

Auction Stocking facility:

Auction Stocking facility are offered by several of the major auction companies and can look attractive. They require no cash outlay, grant dealers access to a large selection of vehicles and give dealers 120 days to sell the vehicle before having to pay for it.

This said, an Auction Stocking facility also has its restrictions; most notably tying the dealer to one specific auction company. They also typically only fund a proportion of the hammer price paid and will often exclude related costs such as auction fees, VAT and transportation.

Finance Company wholesale facilities:

Similar to an Auction Stocking facility, Finance Companies give dealers a way acquiring stock while freeing up cash in their business. With 120 days to sell before the balance requires paying, they can provide the basis for business expansion.

A major drawback for this type of funding is that stock often has to be bought and paid for before it can be funded, so cash is required at the point of purchase and third parties often cannot be paid directly. Also, in most cases only 70% of CAP clean will be funded, leaving the dealer to fund the difference which can be quite a gap on LCVs and margin vehicles. Wholesale finance arrangements are often linked to a reciprocal retail business model: where wholesale credit is only available when you commit to promoting that lender’s consumer finance product to customers. As a result, wholesale finance rates vary depending on the level of reciprocal retail finance.

Bespoke Stocking Plans:

The key difference with this type of funding model offered by NextGear Capital is that dealers receive 100% funding regardless of the source. Thanks to directly integrating with 60+ auctions, funds are paid directly to the auction, ensuring that 100% of the hammer price plus delivery and buyers fees are covered. If buying from an alternative source such as the trade or taking in a part-exchange 100% of CAP clean or invoice price (lower of the two) is funded.

This provides unrivalled flexibility, giving dealers the ability to buy stock from multiple sources as well as the means to buy higher value vehicles, diversify their stock profile, expand their business or simply pick up more of what they know sells well.

As NextGear Capital lend vehicles rather than money, another plus is that dealers only pay for what they use – be that one vehicle or 100.

Conclusion:

When it comes to funding, there is no one size fits all approach: dealerships have different business requirements so need to select the route that’s best for their individual circumstances. We would always encourage dealers to consider a blend of products and arm themselves with the means to buy from the right source, at the right price, at the right time.

Getting the mix right is the key to success.