Wholesale stocking facilities play a key role in ensuring that motor dealers can keep their showrooms and forecourts full of new (and used) models looking for happy new owners. Philip Alton, credit, finance and leasing partner at Gateley, takes a closer look at some of the key issues
If you visit a car dealership and carry out a quick count of the number of vehicles on site and then multiply it by an average selling price, you very quickly reach some pretty significant amounts of money.
Couple this with the fact that those vehicles are likely to comprise a mix of new and used, demonstrators and daily hire vehicles and you will appreciate that a stocking facility needs to be both flexible and well engineered.
The old risks
A stocking facility’s rationale is to provide funding for a dealer to acquire stock in order that the dealer can sell it as quickly as possible and with the minimum of controls and administrative tasks.
This is good news from a sales perspective, but less so from a risk standpoint. As a result, stocking facilities have to tread a fine line, balancing risk against convenience. The risks they have always had to manage include:
The funder not getting title to the vehicle – the route of title will vary according to whether the vehicle is new or used and, in the case of new vehicles, the practices employed by the vehicle manufacturer or importer.
The funder losing title to the vehicle – as the dealer has possession of the vehicle in order to sell it, there are a number of ways in which the dealer can pass title to a buyer, even where the dealer never has title itself. These include where the dealer is a mercantile agent under section 2 of the Factors Act 1889, where the dealer is a buyer in possession under section 25 of the Sale of Goods Act 1979 and where the vehicle is on hire purchase and is sold to an innocent purchaser under Schedule 4 to the Consumer Credit Act 1974.
Problems associated with dealers using agency arrangements improperly.
Practical issues associated with basing advances on the amount paid by the dealer or on the vehicle’s actual sale value.
The new risks
A potentially perfect storm of risks is brewing at present. While some have been ever-present, others are new and it makes sense to prepare for them now. The clouds on the horizon – or possibly rather closer than that – include:
- Economic downturn – the economic outlook is currently more uncertain than has probably been the case for some time. Hopefully this will not affect the UK car market, but it would be advisable for funders to stress-test their documents and procedures now, just in case.
- Brexit issues – the government has recently set out its proposals as to how it intends to take the UK out of the EU. At this stage it remains essentially a wish list, and there is no certainty as to whether the remaining 27 states will agree, or how long it will take to achieve. A number of issues are of particular importance to the vehicle sector, including the possibility of increased tariffs being placed upon vehicles imported into the UK, and volatility in exchange rates.
- Interest rates – considerable uncertainty exists over future interest rates. The volume of new vehicles imported into the UK and the potential for money costs in the UK and the EU to differ by a greater amount than has previously been the case may represent another future challenge.
- Technology risks – significant changes will continue to take place in the new vehicle market. The list is long, but includes potentially reduced demand for diesel vehicles, increased demand for electric vehicles and hybrids (where technological changes are moving ahead at pace), new fuel technologies, autonomously driven vehicles – the list is perhaps longer than at any other time.
- Change-of-control risks – not a new risk as such, but it is difficult to pick up quickly on changes taking place in the shareholders of a business, something which fraudsters have been exploiting of late in certain sectors.
Having a well-thought-out stocking facility agreement which covers off potential default and operational risks is a very good starting point.
When they go wrong, stocking facilities can do so very quickly, so a decent set of documents is only going to minimise risk where it is used in conjunction with strong systems and procedures. Having up-to-date information and exception reporting is key to a funder properly managing its exposure and, perhaps more than in any other area which uses asset finance, it is the combination of all of these available tools that makes for successful risk management.
Funders should look to use some or all of the following to give themselves maximum protection:
- Receiving regular information on financial performance – most systems on which stocking facilities operate update information at least daily.
- The system should be capable of effective exception reporting, so that vehicles and/or accounts which are non-compliant are immediately flagged.
- The funder should carry out regular physical checks of each dealer’s stocks to ensure that they are present and correct.
- An effective policy should be put in place for registering vehicles with fraud-prevention agencies such as hpi.
- The funder should consider whether the funder or the dealer should have control of the vehicle registration documents (V5s). If the funder holds them it can reduce the risks of it losing title to the vehicle – but the administrative hassle is increased.
- The funder must be prepared to move quickly (with car transporters if necessary!) to uplift stock where a default occurs.
- The documentation should cater for amended credit policies so that changes can be made quickly and easily to address new or increased risks.
- Taking back-up security in appropriate cases.