This is the first half of a two-part extract from a paper Richard Jewitt presented to the Financial Conduct Authority in order to highlight gaps in wholesale inventory funding supervision
While inventory funding embraces just about every conceivable high-value asset, motor vehicle (car and commercial) predominates this market. These are assets that have dual identification, that is, registration numbers as well as VIN (vehicle identification number), though all funded inventory should have, as a minimum, a unique serial number. Probably 60-70% of inventory funding relates to motor.
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Wherever there is a requirement for dealer inventory there automatically becomes a demand for working capital funding – wholesale stock funding.
Traditionally this demand has been supported, not by the UK clearing banks, but by their specialist subsidiaries or by the manufacturers of the inventory themselves (the majority have bank status), often as an enticement to generate ‘reciprocal’ retail paper (credit agreements) which attract a significantly higher margin than the ‘wholesale’ funding itself.
Historically, as a consequence of the funders being required to ‘service’ the dealers by physical visits to encourage and monitor their support, audits of their inventory were undertaken by the same field representatives. Today, however, 95% of dealer audits are outsourced.
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By GlobalDataToday the common practice is to operate via ‘agency agreements’, particularly where a facility is granted to the motor retail sector, including cars, light and heavy commercial vehicles, caravans etc. This is known as unit funding. Historically, it was common to use ‘bills of exchange’ or ‘current account’ (or used overdraft facility), depending on the type and age of the inventory.
Security is negotiated between the two parties involved but can sometimes be the inventory itself (if not embraced by an ‘agency’ arrangement) so it is of absolute importance to keep a very careful eye on the status of the funded assets which are in most cases mobile, attractive and of great value individually, and under the absolute control of the dealers.
With the legal constraints introduced over the last decade or so and AFRL (Automated First Registration and Licensing) the opportunity for abuse by motor dealers in respect of new car stock funding is limited. Nevertheless, sometimes opportunities arise where dealers can convert cars into cash without paying the funder for the unit when sold, which is implicit in his wholesale funding agreement. While beneficial title remains with the finance provider it is still imperative that regular audits are undertaken by way of unnotified visits to the dealers to confirm that inventory remains in the dealers possession (i.e has not been sold and the proceeds withheld from the funder) or is being used for the purpose agreed between the parties.
Richard Jewitt is an industry consultant
