Dealership floor plan financing is a type of financing that allows auto dealerships to purchase inventory from manufacturers and suppliers without having to pay cash upfront.
This financing option is typically provided by a third-party lender, such as a bank or a specialty finance company, and is used to purchase inventory, including new and used vehicles.
Dealerships can use the funds from this financing to purchase inventory, which can then be sold to customers, generating revenue for the dealership.
By using floor plan financing, dealerships can maintain a steady supply of inventory, which is essential for staying competitive in the market.
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What Is Dealership Floor Plan Financing?
Dealership floor plan financing is a specialized form of vehicle inventory financing that enables independent car dealerships to access the capital they need to purchase and stock their lots. This type of financing is critical for dealerships to showcase and sell both new and used vehicles.
The lender retains the titles of the vehicles until they are sold to end-users, which allows dealerships to acquire a wide selection of vehicles and make them readily available for customers to test drive and purchase.
Dealerships can repay the original balance plus interest as they sell cars, which allows them to keep a revolving supply of inventory without having to make large upfront purchases or drain their entire cash flow.
This type of inventory financing helps automotive businesses manage cash flow, accommodate seasonal demands, and meet diverse consumer needs effectively. It's a flexible way to finance inventory for a dealership, but must be managed responsibly to avoid exceeding the dealership's capacity to repay.
The financing expense tends to be higher for dealerships due to their fragmented nature, which suppresses economies of scale.
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How It Works
Dealership floor plan financing works similarly to a revolving line of credit, allowing dealerships to obtain financing for the goods they sell, such as cars, motorbikes, and earthmoving machinery.
The loan is made against a specific piece of collateral, and when the dealer sells each item, the loan advance is repaid. The lender has title to the vehicle until it's sold.
Finance firms that execute well on floor plan financing initiatives are properly funded and know how to collateralize the inventory through proper legal documentation and registration.
The average term for a car being on the dealers' lot tends to be within 30-90 days. The lender profits from charging the dealership interest over that period.
Lenders must have reasonable confidence in the financial viability of the dealer, and more experienced and financially solvent dealers can command larger floor planning facilities.
Dealers are subject to rigorous audits of the inventory, with regular checks of VIN numbers, insurance validation, and random inspections to ensure the car is still there and hasn't been sold.
As a dealership sells the car, they pay back the original balance plus interest and then take out additional capital to buy new inventory. The finance company holds the title to the vehicle until it's sold.
Inventory financing is an asset-backed, revolving line of credit or short-term loan made to a company so it can purchase products for sale. Those products, or its inventory, serve as collateral for the loan if the business doesn't sell its products and can't repay the loan.
This type of financing is especially useful for businesses that must pay their suppliers in a shorter period than it takes them to sell their inventory to customers. It also provides a solution to seasonal fluctuations in cash flows and can help a business achieve a higher sales volume.
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Benefits and Key Takeaways
Dealership floor plan financing offers several key benefits for both dealerships and customers.
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. By accessing funds from a lender, dealerships can quickly and efficiently acquire new vehicles, keeping their inventory up-to-date and attractive to potential buyers.
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.
Floor plan financing frees up cash flow for dealerships, allowing them to allocate their funds to other operational expenses, such as marketing and staff training.
Here are some key takeaways about floor plan financing:
- Floor plan financing is a short-term loan arrangement used by retailers to finance large-ticket inventory items displayed in showrooms.
- Car dealerships often use floor plan financing to manage their new and used car inventory, with loans repaid as cars are sold.
- The loans are asset-backed, using the purchased inventory as collateral, and are offered by various lenders, including specialty finance companies.
- Floor plan financing is crucial for managing cash flows, particularly for businesses that face seasonal sales fluctuations or longer sales cycles.
- Due to the fragmented nature of the auto dealership industry, financing terms can vary and must be carefully managed to avoid excessive financial burden.
Managing a Dealership
Managing a dealership requires careful planning and attention to detail, especially when it comes to floor plan financing. Dealerships must exercise responsible inventory management to avoid overextending their borrowing capacity.
Purchasing inventory in proportion to sales figures is crucial to avoid buying more than can be sold. Overextending inventory can lead to difficulties in making loan payments and raise concerns with lenders about the stability of the business.
Effective cash flow management is also essential to ensure financial stability and prevent liquidity issues. Dealerships must avoid situations where multiple bills mature simultaneously, potentially leaving the dealership unable to meet its financial obligations.
Here are some key factors to consider when managing cash flow:
By prioritizing responsible inventory management and effective cash flow management, dealerships can ensure the stability of their business and make the most of their floor plan financing.
Choosing a Lender and Financing
Choosing a lender for your dealership's floor plan financing is a crucial step. It's essential to research the lender's track record in floor plan lending and understand their operational processes for audits, reporting, and payment procedures.
A lender with experience in working with auto dealerships can provide obvious and less obvious benefits compared to traditional banks. Building a strong relationship with the lender based on trust and transparency is essential for long-term success.
To ensure you're receiving the best deal, thoroughly examine the unit stocking plans to consider factors such as the percentage of the vehicle's value that the funder will provide, including VAT on qualifying vehicles.
Consider the following questions when reviewing your floor planning financing:
- What percentage of the value of the vehicle will the funder provide? Does this include VAT on qualifying vehicles?
- Does the funding allow you to purchase inventory from all sources including private sales, part exchange, and trade-sourced stock?
- What period does the finance run for, 120, 150 days? What period best suits your average stock turnover?
- What stock management and reporting software does the funder provide?
- Do the floor plan financing companies offer market intelligence that could give you more control over stock selection and sourcing?
Maintaining the confidence of the lender is essential, so ensure that stock inventory audits are frequent, accurate, and provide the level of detailed information required by funding providers.
Risks and Considerations
Dealerships who struggle to sell their inventory quickly may be at risk of accruing higher interest rates or other charges. This can put a strain on the dealership's finances, making it difficult to repay the loan.
The fragmented nature of the auto dealership industry can also lead to higher financing expenses for independent dealerships. This is because financing expense tends to be higher than for a large corporate entity.
Dealerships should be aware of hidden or excessive admin and audit fees that some non-Kinetic dealers have expressed frustration with. These fees can add up quickly and eat into the dealership's profit margins.
Risks of Car Dealers
Dealerships who struggle to sell their inventory quickly may be at risk of accruing higher interest rates or other charges. This can put a strain on the dealership's finances and make it harder to manage their cash flow.
Some non-Kinetic dealers have expressed frustration with hidden or excessive admin and audit fees. These fees can add up quickly and eat into the dealership's profit margins.
The auto dealership industry is fragmented among thousands of independent dealerships, many of which have unique needs. This fragmentation can make it harder for dealerships to get the financing they need at a good rate.
Floor plan financing can be a flexible way to finance inventory for a dealership, but it must be managed responsibly to avoid excessive financing costs. Dealerships need to be aware of their cash flow and inventory levels to avoid getting into trouble.
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FAQs and Advice
If you're considering floor plan financing for your dealership, it's essential to understand that financing expense tends to be higher than for a large corporate entity due to the fragmented nature of independent dealerships.
Floor planning is a flexible way to finance inventory, but it must be managed responsibly to avoid financial strain. Dealerships should be able to view their titles in real time and receive overnight title returns for effective management.
Dealerships can maintain a healthy cash flow while stocking a diverse inventory by using a line of credit, which helps attract a wider range of customers and respond quickly to changing market trends.
It's crucial to manage floor plan loans responsibly, as the cost of financing can surpass the dealership's ability to repay if not managed properly. Dealerships should prioritize prudent financial management to avoid financial strain.
By leveraging lenders' funds, dealerships can maintain a diverse and readily available inventory, but this requires effective communication with lenders and responsible inventory management.
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Frequently Asked Questions
Do dealers pay floor plans on used cars?
Dealers pay back the original loan as they sell their used car inventory on a floor plan. They may also be charged a small fee if the vehicle doesn't sell within a contractually determined timeframe.
How do you get approved for a floor plan?
To get approved for a floor plan, you'll need to provide proof of a valid business and active dealer's license, as well as a strong credit history. Having these in order can help you secure a competitive offer and get the financing you need to grow your business.
What is floor plan financing interest expense?
Floor plan financing interest expense is the cost of borrowing money to purchase vehicles, which accrues while the vehicles sit on a dealer's lot. This interest expense is paid to the lender by the dealer.
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