In the ninth of our series of insights into running an efficient dealership, Thurlby Motors’ managing director Chris Roberts looks at funding.
E every business uses external funding of some description, from a basic overdraft to used car stocking lines or even debt factoring.
Getting these in the right structure and mix is vital to success and if cleverly controlled can have a massive effect on the bottom line by significantly reducing the overall interest burden and direct funding costs.
Let’s firstly look at the overdraft. Often the level of facility is either a carry over from the prior year or set based on the maximum the bank
allow the business to borrow.
Although this is sometimes done for simplicity or to avoid rocking the boat, some careful planning prior to renewal can pay off significantly.
With regard to overdraft levels, I would recommend that businesses undergo a full review of requirements while budgeting.
Factors such as forecast cash flow and business trends should be carefully considered.
Obviously you don’t want the overdraft to be too restricted, but too large a facility is also problematic.
By keeping the facility down to the required level you will reduce your arrangement fee, give yourself better bargaining power on rate and also be forced to manage the business more closely and in line with your plan; never a bad thing.
Overdrafts are secured against business assets.
This is generally restricted to fixed assets, but often some leverage can be gained by including the value of the non-vehicle debt book.
If this is strong, banks will sometimes fund up to 60% of its value.
Using good controls
Stocking loans are also very manageable and are often the preferred method of funding in the sector as they benefit from less onerous security requirements and information commitments (no need to provide the funder with monthly management accounts).
However, as with the overdraft, make sure you understand the specific requirements of the business before negotiating your package.
If you have an accurate business plan, you should be able to calculate required stock units.
Once again, getting this right will ensure you are best placed to agree a level of stocking facility to fit your business parameters.
If the opportunity is there with your current provider, take a look at whether you are better with a unit stocking facility (no financial cap, just unit limit), or a simple financial plan.
The ability to negotiate better interest and funding costs will be greatly improved if you get your homework right.
If the business is being managed well it should also be possible to minimise interest and stocking costs by maximising use of the most cost-effective funder (bank or stocking provider).
Basically, if the overdraft is running at a better rate of interest than your stocking plan and you have headroom, why not allow some vehicles to be funded by the bank rather than incur the higher interest costs and funding charges of stocking.
Obviously care has to be taken when doing this kind of exercise to ensure that agreed levels aren’t breached, but done well this can save thousands of pounds each year.