Floor Plan Financing for Dealership Success

Floor planning is one of many factors that contribute to a vehicle or heavy equipment dealership’s success. When properly utilized, this financing tool enables dealers to efficiently purchase and manage their inventories, respond to market trends and serve customers effectively.

So, what do dealers need to know about floor plan financing?

How does floor plan financing work?

Floor plan financing is a type of revolving credit for dealerships to purchase vehicles, equipment and other high-value assets. Lenders, often banks or specialized financial institutions, extend a line of credit to dealers to buy inventory from manufacturers, auctions and other sources.

Once the inventory is purchased with credit, the dealer holds it to generate sales. The lender retains a security interest during the contractually determined sales period because the financed assets serve as collateral. When each asset is sold, the dealer repays the lender for that piece of inventory, plus any accrued interest and/or fees (see below). The repayment process continues until all financed inventory is sold, at which point the lender typically restores the dealer’s line of credit for additional purchases.

In certain situations, inventory may not sell within the expected timeframe (known as curtailment). In such cases, depending on the terms of the agreement with the lender, dealerships may incur additional fees. This necessitates effective inventory management on the part of dealers to prevent unnecessary costs.

When exploring floor plan financing, leveraging digital tools provided by the lender can be transformative for managing your inventory:

• Self-Service Tools: Simplify the purchasing and payoff processes for financed stock.
• Inventory Audits: Conduct smooth, periodic audits to ensure inventory accuracy and accountability.
• Advanced Reporting: Utilize tools like inventory-aging reports, sales-performance analytics, and payment-history summaries to gain deep insights into your business operations and make informed decisions.

These digital solutions empower dealers to manage their inventory more effectively and respond adeptly to evolving market conditions.

Benefits beyond inventory

The benefits of floor plan financing extend far beyond increased inventory. It is a robust tool for dealers to manage several aspects of their business:

• Improves cash flow: Frees up capital that would otherwise be tied up in inventory, allowing dealers to allocate resources to other areas of their business.
• Increases flexibility: Allows dealers to quickly adjust their inventory levels based on market trends and consumer demand without significant financial strain.
• Maintains relationships with suppliers: Enables dealers to purchase new models to meet manufacturer requirements, fostering the mutual trust and respect required to maintain healthy dealer-supplier relationships.

A structure fit for success

What sets floor plan financing apart from other traditional methods is its sell-to-pay structure. A credit arrangement that allows the lender to be repaid once the inventory is sold is favorable to the average dealer’s operating model, which requires financial nimbleness to maximize revenue amid fluctuating market conditions and consumer preferences. With the right vision and lender, the benefits derived from floor planning can be the driving force behind a dealer’s current and future success.

Common Questions

How does floor plan financing differ from traditional loans?
Traditional business loans can be used to provide financing for a wide range of purposes, although terms and repayment schedules may be less flexible. Floor plan financing, on the other hand, is a line of credit that is adaptable to the sales cycles of dealerships, allowing them to manage cash flow and inventory levels effectively by repaying the credit as inventory is sold.

Can floor plan financing cover both new and used inventory?
Floor plan financing is versatile and can cover both new and used inventory, giving dealerships the ability to diversify their stock and cater to different customer preferences and budgets.

What happens if financed inventory doesn’t sell in time?
If inventory financed through a floor plan does not sell within the expected timeframe, dealers may face curtailment charges or other fees. Effective inventory management and periodic adjustments, perhaps aided by modern digital tools, can help to avoid such scenarios.