The independent used car dealerships in Africa face tremendous challenges in accessing capital for financing inventory purchasing as a result of the industry largely perceived as informal by financial institutions.
It is for this reason that today we unpack the insights in the Dealer Floorplan Financing and breakdown how it works, and why it can be a beneficial option for independent used car dealerships and the customers.
Floor plan financing is a way for dealerships to finance their inventory, acquiring vehicles on credit and paying it off as they make sales.
This is very essential because purchasing inventory outright can be prohibitive.
Using this specialised form of vehicle inventory financing the independent car dealerships can access the capital they need to purchase and stock their showrooms to acquire a wide selection of vehicles, making them readily available for customers to test drive and purchase.
In the majority of cases, the lenders retain the titles of the vehicles until they are sold to end-users thereby making securitisation easier.
This is more practical in countries such as Zimbabwe, Zambia, Tanzania, and Uganda which allows the imported vehicles to pass through the borders before the taxes are paid and store them in the bonded warehouses controlled by the government revenue authorities.
When the inventory is sold one by one, the dealership pays back the original balance plus interest.
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This allows dealerships to keep a revolving supply of inventory without having to make large upfront purchases or drain their entire cash flow.
In essence the Floor plan financing works similarly to a revolving line of credit.
It is a type of short-term financing designed to help dealerships cover the cost of their inventory while also allowing them to adjust their stock without incurring a major financial burden.
When a dealership wants to purchase a vehicle, they send a request to their finance company. When approved, the finance company will release funds for the vehicle purchase directly to the supplier.
The benefits to customers:
Enhanced customer experience
With a well-stocked inventory, dealerships can offer customers the opportunity to test drive and purchase vehicles immediately.
This immediate availability improves customer satisfaction and can lead to higher sales.
Reduced risk of importing vehicles
Importing cars from far away sources presents a huge risk to customers and having stock being available conveniently in the bonded warehouses within the country is more secure to the customers.
The benefits to the dealers:
Increased inventory
Floor plan financing allows dealerships to maintain a larger inventory, ensuring a wide selection of vehicles for customers to choose from.
This increases the likelihood of making a sale and satisfying customer preferences. With the bonded warehouse facilities, the inventory can be spread in different locations to create convenience for different types of customers.
Streamlined inventory acquisition
By accessing funds from a lender, dealerships can quickly and efficiently acquire new vehicles, keeping their inventory up-to-date and attractive the potential buyers.
Improved cash flow
Floor plan financing frees up cash flow for dealerships, as they can allocate their funds to other operational expenses.
This flexibility allows dealerships to invest in marketing, staff training, and other initiatives that drive business growth.
Reduced administrative costs
By utilising floor plan financing, dealerships can streamline their inventory acquisition process and reduce administrative tasks associated with purchasing vehicles outright.
I also believe that the government will also benefit by collecting the taxes in a secure manner because the money will be coming from a well-structured source whose taxes are calculated when the cars are being placed into the bonded warehouse facility.
What should the dealers do to secure the facility;
Formalise the business;
Majority of the Used Car Dealers run this business as an informal SME and they do not do any banking.
However, it is essential to meet the basic Know Your Customer (KYC) with banks which includes company registration, tax compliance by paying taxes, getting annual audited financial statements and the trading licenses from the local authorities.
Maintaining proper books of accounts
It is essential to maintain proper books of accounts that can lead to the successful auditing of the books. However, in order to have good records one must be banking their money so that there are bank statements to prove that the business is viable and has a cash flow.
Have an association for all the dealers
It is highly recommended to have an association that is recognised by the government to engage on industry policy issues. I am aware that we have the Motor Trade Association of Zimbabwe (MTA).
However, having been the past chairman of the Used Vehicle section under MTA 17 years ago l certainly know that its vision is more connected to the brand new vehicle dealers emphasising the collection of the industry levies and passing them on to the govt. It is my view that the used car dealers requires a separate association that understands the peculiarities of its member challenges and industry dynamics.
Although l am aware that there were some efforts previously to set it up but it ended up not succeeding because of a lack of leadership direction and competing for positions that became retrogressive to its objectives.
In Japan all exporters of used cars are represented by the Japan Used Motor Vehicle Exporters Association to which l am privileged to personally know the current managing director of the organisation.
I also know that in Kenya the Kenya Auto Bazaar (BAZ) is the main representative body chaired by John Yator and the organisation is involved in industry policy matters on a daily basis with its government.
Similarly, in Uganda, the Used Car Dealers Association Uganda Limited is the representative body headed by Charles Kamunvi.
Our country currently uses the United States dollars as one of its currencies, which those with income in US dollars can borrow at an interest rate of between 12 to 15% per annum.
So the viability of utilising this credit line lies in good profit margins that can still cover the lender’s interest rates, bonded warehouse storage charges, and any other costs associated with the borrowing.
My wisdom in this business convinces me that it is very viable mostly if the dealers have experience in such a manner that they only order inventory under this financing on “fast-moving models”.
The stocks should be sold within a maximum of 90-120 days to minimize the cost of borrowing and maintain reasonable profit margins.
If a dealer uses this inventory financing model and assuming they sale of their stocks after four months their total interest cost will be 5% of the borrowed funds.
In the last six years’ l have been working with financial institutions mostly through their trade finance departments to arrange some financing models including the normal asset financing for individual customers.
I have noted with experience that international banks who operate from South Africa, Europe, Asia and USA have knowledge and interest of these kinds of funding models.
Other banks do not have the knowledge and hence it may take time for them to make a decision.
While it may be easy to start this dealer floor plan financing but its sustainability lies in the responsible inventory management between the parties, good cash flow management to fulfill the repayments by the dealers, and timely inventory turnover that reduces the overall costs to the dealers and maximises the profits.
I want to encourage the financial institutions interested in offering such financing to contact me so that we can engage and perhaps unlock the arrangements that can create a win-win situation and tape into this industry that enjoys about 85% of the business compared to the 15% enjoyed by the new vehicle dealers.
*Stanley Makombe has 25 years of experience in the motor industry, currently handling vehicle imports from Japan, Thailand, the UK, and South Africa into African countries. He is writing in his capacity and can be contacted on +254 743 900 590, on X @Stan_Carsales, email: stanley@stanleymakombe.com, www.stanleymakombe.com
