Motor trade finance for car and van dealers

A used vehicle ties up cash from the moment it is bought. Auction houses and trade sellers expect payment within a day or two. Then come transport, valeting, mechanical work, an MOT, cosmetic repairs and photography before the car is listed. It might sell in three weeks or three months. If the buyer takes finance, the finance company pays the dealer after the paperwork is complete, not at handover, and a part-exchange arrives that needs preparing or selling on.

VAT adds a second layer. Most used cars are sold under the margin scheme, so VAT is due only on the dealer's margin, but no VAT can be reclaimed on the purchase. Commercial vehicles and some ex-business cars are bought with VAT charged, which the dealer pays at purchase and recovers on its next return. HMRC's guidance on the VAT margin scheme for second-hand vehicles explains which vehicles qualify. A dealer stocking vans therefore needs more cash per unit than one selling margin-scheme cars at the same price.

Demand is seasonal too. The March and September plate changes bring new-car registrations and a wave of part-exchanges, convertibles sell in spring and four-wheel drives in autumn, and the weeks before Christmas are usually quiet on forecourts.

A stocking plan, also called floorplan finance, is a revolving limit for buying vehicles. The provider pays the seller, often directly at auction, and you prepare and sell the car. When it sells, you repay that vehicle's funding, usually within a few days of sale, and the limit is free for the next purchase. Interest or a monthly charge runs on each funded vehicle, and many plans add a fee per unit.

Three features matter more than the headline price:

• Curtailment. After a set number of days a vehicle must be part or fully repaid, even unsold. It stops ageing stock sitting on the limit, but it can force cash calls at awkward times.
• Audits. Providers visit, often unannounced, to check every funded vehicle is on site with its keys and registration document. Online dealers holding stock at a separate storage site must give auditors access there too.
• Repaying sold vehicles. Keeping the sale proceeds of a funded car and not repaying it is the most serious breach of a stocking agreement, and providers act fast when they find it.

Our stock finance page explains how lenders fund inventory in other sectors.

Arranging car finance for retail buyers is separate from funding your own business. Introducing customers to a finance company is regulated credit broking, so a dealer needs the right permissions, held directly or as an appointed representative of another firm; the FCA's guidance for motor dealers acting as credit brokers explains the options. The FCA's review of historic motor finance commission arrangements means stocking providers and lenders may ask how your commission was disclosed in the past, so keep records of the arrangements you have used.

• Falling values. Used prices move with new-car supply, and used electric car values have been notably volatile. Stock bought at the top of the market can sell below cost.
• Overstocking. A larger limit tempts dealers to fill the forecourt with cars that turn slowly. The limit you need is set by stock turn, not by space.
• Distance sales. Cars sold online or by phone can usually be returned within the statutory cancellation period, so cash from a sale is not always final.
• Guarantees and security. Stocking plans normally take personal guarantees, and a debenture can limit what other lenders will offer. Our guide to personal guarantees explains the commitment.
• Alternatives. Running a smaller, faster-turning stock list, sale-or-return arrangements with trade partners, or HMRC Time to Pay for a one-off VAT bill can all reduce what you need to borrow.