Stocking finance, also known as stock funding or unit stocking, is a specialised form of credit designed to help businesses, particularly car dealerships, finance the purchase of stock for resale. By providing flexible access to funds, stocking finance allows dealers to buy vehicles and other assets without tying up cash reserves, enabling them to maintain and expand their stock levels efficiently.
This type of financing is tailored to meet the needs of businesses that manage a constantly changing inventory, such as car dealerships, and is primarily used to purchase vehicles like cars, vans, trucks, and agricultural vehicles. Stocking finance helps dealerships grow by maximising cash availability, improving cash flow, and enabling faster business operations.
How Does Stocking Finance Work?
A stocking finance facility works similarly to an overdraft, where the dealership is given a pre-approved credit limit by a lender. The dealership can then use this credit to purchase vehicles for resale. When a vehicle is sold, the dealer repays the loan amount plus any applicable interest and fees, freeing up the credit to be used for purchasing new stock. Here’s a breakdown of the typical steps involved in using stocking finance:
- Credit Facility Setup: After applying for stocking finance and being approved, the dealership is provided with a credit limit, which could range from £50,000 to over £1 million, depending on the dealership’s size and financial situation.
- Purchasing Stock: The dealership can use this facility to buy vehicles, either from auctions or directly from suppliers. Some finance providers limit where stock can be purchased, while others offer more flexibility.
- Selling Stock: When a vehicle is sold, the dealer is required to repay the portion of the loan used to purchase the vehicle, along with any fees or interest accrued.
- Reusing Funds: After repayment, the dealership can immediately reuse the available credit to buy more stock, keeping the forecourt stocked and cash flow steady.
If a vehicle isn’t sold within a set time frame (usually 120–160 days), the dealership must repay a portion or the full amount of the loan.
Benefits of Stocking Finance
Stocking finance provides several key advantages, particularly for businesses in the automotive sector:
- Improved Cash Flow: Instead of tying up significant amounts of capital in stock, dealerships can free up cash to invest in other areas of the business, such as marketing or expansion.
- Flexibility: Many stocking finance providers offer flexible repayment terms, allowing businesses to repay loans only after the sale of vehicles.
- Increased Stock Levels: Dealers can expand their forecourts and purchase more vehicles without upfront payments, enabling them to offer a broader selection to customers.
- Quick Access to Funds: Stocking finance is usually fast to set up, and once the facility is active, funds can be accessed on short notice to purchase vehicles.
Where to Get Stocking Finance
Dealers can obtain stocking finance from various sources, including:
- Banks: Traditional banks often provide stocking finance to dealerships, although their terms may be less flexible than independent providers.
- Independent Finance Companies: Specialised lenders that offer stocking finance tailored to the unique needs of dealerships, often with more flexibility in terms of stock sources and repayment.
- Auction House Finance Facilities: Many auction houses offer their own financing options, allowing dealers to purchase vehicles directly through the auction with credit.
- Wholesale Finance Providers: These lenders specialise in providing large-scale finance for dealerships purchasing stock from wholesale suppliers.
When choosing a stocking finance provider, it’s crucial to consider more than just the interest rate. Dealers should evaluate:
- Fee Structures: The overall cost of stocking finance can include various fees beyond interest, such as administration or transaction fees.
- Customer Support: A responsive customer service team is essential for addressing queries and resolving issues quickly.
- Stock Restrictions: Some providers may limit where stock can be purchased, while others offer more freedom.
The Application Process for Stocking Finance
Applying for stocking finance involves several steps, and the process typically takes about a week from application to approval. Here’s what you need to know:
- Gather Financial Information: Provide the latest filed financial statements, up-to-date management accounts, and a list of current stock.
- Personal Guarantees: In most cases, business owners must offer personal guarantees, so be prepared to share personal financial information.
- Credit Checks: The lender will review the credit history of both the business and its owners. A good credit history can increase the chances of approval and result in more favourable terms.
- Approval: Once the application is submitted, lenders typically take 3–5 days to make a decision. After approval, the account can be set up within a week.
Considerations When Choosing Stocking Finance
Choosing the right stocking finance provider can significantly impact a dealership’s operations. Here are some key factors to consider:
- Interest Rates: Be sure to look beyond the headline interest rate. The overall cost may include various fees, so it’s essential to calculate the total cost of the facility.
- Payment Terms: Understand how and when repayments are required. Some providers allow immediate reuse of funds after a sale, while others may have waiting periods.
- Stock Restrictions: Ensure the provider allows you to purchase from your preferred sources, whether that’s auctions, wholesalers, or trade vendors.
- Support and Auditing: A provider with good customer service and flexible auditing procedures can make managing your finance facility much smoother.
Alternatives to Stocking Finance
While stocking finance is ideal for many dealerships, other options may suit certain businesses:
- Business Loans: Traditional business loans can provide larger sums for business expansion but may not offer the same flexibility as stocking finance.
- Invoice Financing: Dealers can use unpaid invoices as collateral to access cash quickly, though this option is more suited to businesses with extended payment terms.
- Lines of Credit: A business line of credit allows companies to draw funds as needed, similar to an overdraft, but may not be as tailored to the specific needs of dealerships.
Is Stocking Finance Right for Your Business?
Stocking finance is a valuable tool for dealerships looking to manage their cash flow, expand their inventory, and grow their business. However, it’s important to carefully review the terms and conditions, ensuring they align with your dealership’s needs. If you have a reliable sales model and can manage repayments effectively, stocking finance can be a game-changer in keeping your forecourt full and your cash flow strong.