Capital Thinking: Funding strategies for a changing motor retail landscape

The motor retail sector is navigating a challenging period as firms contend with significant structural change. Profitability has come under pressure, declining by approximately 25% in 2025, with EBITDA margins across the top 100 groups averaging 2.76%.

Despite headwinds, motor retail firms continue to show resilience, and the sector has seen recent positive news. Used vehicle volumes are improving – and consumer demand helped the new car market reach its highest volume in February for 22 years, despite this month typically being the quietest for sales. The FCA has also given much needed clarity on the motor finance compensation scheme.

Battery electric vehicles (BEV) now represent 22% of the market year to date. But with 65% of drivers still perceiving EV ownership costs to be higher than petrol or diesel vehicles, and the ZEV mandate requiring BEVs to reach a 33% market share for 2026, there are huge uncertainties around what the future holds.

Challenger brands are reshaping competitive dynamics

Competitive pressures are increasing as challenger brands such as BYD, MG, Omoda and Jaecoo rapidly expand their UK presence. Their growth has been fuelled by aggressive pricing strategies, tech heavy models and fast product development.

By offering extremely flexible dealer partnerships, challenger brands have created significant dealer networks which are expected to continue to increase sales at the expense of legacy brands. For example, in 2025, Chinese brands garnered a market share of 10%, with some analysist predicting this will double by 2030. According to the SMMT, BYD sold 51,000 cars in 2025, achieving a 2.5% market share. In comparison, it took Hyundai over 27 years to achieve a 2% market share in the UK.

Backed by cheap capital and strong state support, these challenger brands are reshaping consumer expectations and the motor retail sector. Brand loyalty is proving less influential than anticipated, increasing the importance for retailers to make strategic decisions about which brands they represent and where future growth is likely to come from.

Regulatory EV requirements amid uncertain consumer demand

The Zero Emission Vehicle (ZEV) mandate requires that 33% of all new car registrations in 2026 are zero‑emission, up from 28% in 2025. However, buyer confidence remains inconsistent, with ongoing concerns around charging access and running‑costs. New pay-per-mile charges for EVs from 2028 risks further dampening appetite at a critical stage of the transition.

This creates a challenging balance for retailers who must comply with evolving regulatory requirements and invest in EV infrastructure and training despite uncertain consumer demand. A clear mismatch between supply and demand can leave retailers holding stock that does not turn quickly, exposing them to significant residual‑value volatility. Rapid technological improvements and shifting government incentives have caused certain EV models to fall sharply in value. Government incentives for new EVs may bolster sales but can also weaken the used EV market impacting retailers who need to shift stock.

For retailers, the financial difficulties are clear: if used EV stock sits too long, or depreciates faster than expected, margins can erode rapidly. This makes data‑driven pricing and stock‑mix optimisation essential. It also places renewed emphasis on having flexible liquidity and funding structures that can absorb fluctuations in valuation.

Rising operational costs across the sector

Rising operational costs are a significant challenge for the sector, placing sustained pressure on margins. The rise in employers’ National Insurance Contributions in April 2025 added an estimated £140 million in annual costs across the top 200 motor retail groups, while further minimum wage increases implemented from 1 April 2026 adds additional strain.

Elevated energy prices, exacerbated by geopolitical tensions in the Middle East, alongside higher compliance and property expenses also continue to impact profitability.

With the cost of doing business expected to remain high, retailers will need to maintain a disciplined focus on cost control and operational efficiency, prioritising the areas they can directly manage through regular cost reviews.

Investment in technology is key

Investment in technology is becoming essential for UK motor retailers as predictive intelligence and data‑driven decision‑making drives efficiency and determine profitability. Advanced tools that support smarter vehicle acquisition and used‑car pricing intelligence are now critical for identifying the fastest‑turning stock allowing retailers to improve forecasting accuracy and prioritise vehicles with stronger margin potential.

However, many retailers still rely on ageing, disconnected systems. Delivering a fully integrated, data‑enabled operating model requires significant investment and access to long‑term capital – which can be challenging for smaller retailers.

Building the right capital structure

We help firms achieve the right capital structure to support both day‑to‑day liquidity as well as longer‑term growth. Motor retailers have many different financing options, including:

• Stock funding facilities - The right stock funding strategy can unlock liquidity, enable fast acquisition of vehicles and help preserve profit margins
• Asset‑based lending - Enables retailers to leverage property, parts inventory, receivables or other assets to create additional liquidity
• Term debt - Where retailers are making multi‑year technology upgrades, refurbishments, site consolidations or expansions, term debt helps separate capital investment requirements from working‑capital cycles
• Sustainable finance - The introduction of the Sustainability Reporting Standards in 2025 and the adoption of the International Sustainability Standards Boards’s S1 and S2 standards is enhancing the transparency and accountability expectations of lenders. Sustainability linked finance - where lenders tie the interest rate payable on a loan to the achievement of relevant environmental, social or governance targets – can open up an expanded pool of lenders and financial products

A well‑structured balance sheet can help strengthen a firm’s financial resilience. Diversifying the lender base also reduces risk that comes with being reliant on one or two institutions.

Motor retailers should also consider undertaking accurate and granular forecasting. This allows areas of strength and concern to be quickly identified, while longer-term forecasting can assist with investment decisions.

This approach also allows motor retailers to monitor their covenant headroom, identify pinch points early and proactively communicate with lenders when necessary.

For more information, contact Christopher McLean, Jon Roden or Jon Bramwell.