Why flexibility is key when funding your forecourt
In today’s world dealers have a wealth of funding options available to them to invest in stock and keep their forecourts filled. For most, the two main options are captive finance: funding that comes with certain restrictions or is tied to a certain stock source, and non-captive finance: funding provided by an independent company that gives more freedom as to where you buy from.
For some dealers, their wholesale funding is tied to their retail business—also known as reciprocal finance. This means that consumer finance packages directly impact a dealer’s wholesale funding, and to qualify for a certain rate or credit limit for wholesale funding the dealer has to sell an agreed amount of consumer finance.
When sales numbers are high this isn’t a problem, but there are intrinsic risks in this type of finance relationship. Miss the retail finance sales targets set, and the dealer can be hit by penalties including increased rates or a decreased credit limit.
The latest Fleet & Leasing Association (FLA) data has highlighted this problem. In November 2020, consumer used car finance volumes saw a 23% drop compared to the previous year. For those dealers on the type of wholesale finance agreement that’s tied to their retail performance, this could result in a lack of cash flow and funding for new stock.
Consumer funding trends can change
While finance continues to be the main way a consumer will fund their vehicle, it’s important to remember that not everyone will, and due to the pandemic we are seeing more cash-rich consumers using their own capital to fund their next purchase or making use of low-interest loans from mainstream lenders.
Currently over half of all used car transactions use finance of some sort to funds the purchase. Although this represents a sizeable proportion of deals, this leaves a large number with no finance option attached, and the FLA data has shown that this number can fluctuate.
Reciprocal finance deals can limit the finance options you can offer customers by forcing you down a one size fits all route that’s not always beneficial to the customer. They are also particularly exposed to demand fluctuations meaning an unforeseen event such as another lockdown can severely impact the number of sales you make and potentially miss consumer finance targets.
What to consider when deciding what type of finance to use
As the FLA data reveals, consumer finance decreased in 2020, likely as a direct result of the pandemic. Therefore, it is important for dealers to plan accordingly.
This could just be a short-term trend and of course, finance will always be the main option for the majority of people, but it’s important to remember that a large number of sales won’t include finance and any fluctuations can starve your funding lines if you’re on a reciprocal funding agreement. If you rely on the type of captive finance that’s linked to your retail finance sales, you should be aware that changing consumer trends can leave you short of your targets.
Our advice would be that you should enter any finance agreements with your eyes wide open. Be aware of the pros and cons and remember that the cheapest finance option is not always the best value in the long run.
We suggest having multiple funding lines available to you to avoid an over-reliance on one area. It’s important to keep the cash flowing and you don’t want consumer trends tied to unforeseen circumstances to restrict the amount of money you have available to invest in additional stock or diversify your portfolio.
How to decide the best stock funding option for you
While the market is understandably unpredictable at the moment with many external factors such as Brexit and the pandemic, good planning can help you weather any storms that are yet to come. The Cox Automotive Insight Report 2020 urges dealers to plan for the short-term while the market remains uncertain as it allows you to remain agile and move with the ever-changing market.
As for funding, remember there are a wealth of options available to you and it’s important to keep your eyes open and explore what’s out there. Whether you choose to use captive finance, non-captive, finance, loans or even government-backed support, each has its advantages, and each should be considered.
At NextGear Capital, we appreciate that you won’t always use our Stocking Plans to fund your wholesale vehicle purchases, but as part of Cox Automotive we have an unrivalled view of the entire automotive ecosystem and can offer you the advice you need to better navigate what’s to come.
If you want to learn more about our flexible, straightforward and dependable stock funding options, contact us here.