The most common form of working capital funding for motor retailers is their bank overdraft. This should be the cheapest form of financing, because it should only be drawn upon when required and paid for during the time of use. But there are pitfalls.

Overdrafts should only be used to fund variations in the normal cycle of monthly working capital requirements. There is no magic formula linking overdraft requirements to turnover – the extent of fluctuations during a month differs for every business.

On average the account of an automotive retailer with a turnover of £50m is likely to fluctuate by up to £1m in a non-peak month. Hardcore overdrafts tend to be rather more expensive and should, therefore, be re-structured. Retailers invariably exceed their overdraft facilities from time to time – and this is costly. Nothing will shake a bank's confidence in the business than unarranged excesses.

Much has been written about the need to stringently control working capital requirements and this is generally efficiently run by motor retailers. There are, however, ways to measure working capital efficiency.

Apart from cost, the key aspect to consider when planning working capital funding is to match, as much as possible, funding to the asset.

This is because providers of specialist finance are not only better placed than the banks to understand, control and monitor the asset they are financing, they can also get better security. Accordingly, they are likely to offer a more advantageous lending formula because they will generally only be able to take a floating charge over working capital assets (particularly since the Brumark case – see AM Sept 27 – has cast doubt on the banks' ability to take a fixed charge on debtors).

Floating charge security is less attractive to banks because:

  • It ranks behind the preferential creditors, the level of which often increases when businesses are in financial difficulties
  • They are not in a position to closely monitor floating charge asset levels, which often dissipate during financial difficulties
Retailers should consider the following funding options to maximise working capital facilities:

  • Unit stock funding for used cars
  • Manufacturer schemes to fund new units, demonstrators, rentals and fleet sales
  • Lease/hire purchase for company vehicles and key items of plant and equipment
  • Property mortgages
  • Factoring/invoice discounting
Clearly, maximising alternative sources of finance will alleviate overdraft pressure.

One of the most common pitfalls is the under-utilisation of stock funding when cash is tight. Retailers must track, on at least a monthly basis, their stock funding drawdown as a percentage of total used car stock.

Consider, also, the facility cap. Is it sufficient? Has it been increased to reflect organic growth, changes in used vehicle mix or your latest acquisition? Fleet sales are usually high value/low margin contracts. If these cause breaches in overdraft facilities, the penalties applied will often mean that deal is loss-making.

Track total vehicle debtors against total vehicle creditors. Ideally, creditors should fund debtors and not be a burden on the overdraft. This measure focuses the mind on the impact of fleet sales on working capital requirements.

Finally, it raises a further, and cheaper, funding option for working capital: suppliers. While I do not support delaying payments to creditors, I do recommend strong negotiation of terms and fully utilising those terms.

As a measure of efficiency, consider parts stock. Assuming a parts stock turn of 12 and a net monthly account with the supplier (e.g. October purchases paid on 20 November), the parts supplier could be funding the entire parts stock holding if the stock management is adequate. How many customers rely on their retailer to fund stock?