Dealer Floor Plan – should you use one ? -Pros vs Cons

You may be considering a floor plan or floor planning for your Dealership. I just want to give you a good working definition. Think of a floor plan as the credit plan or revolving line of credit for Auto Dealers  – specifically for purchasing vehicle inventory. It acts more like a credit card and less like a loan. The amount you can utilize from day-to day goes up or down based on your utilization and real-time payments.

You can think of a Floor Plan quite similar to a regular consumer credit card. In this country, Credit cards are issued by a bank to an individual. An individual can then buy stuff with that credit card (a credit card is essentially the physical representation of a line of credit from a bank) .  So if you buy a pair of jeans on your credit card, the money borrowed from the bank collects interest, and you have the  choice to either make a minimum payment (credit) or pay off the entire balance (charge or short-term loan) in full when the bill is due.

So how does floor plan financing work?
Much like a credit card, a floor plan financing company extends a line of credit to a car dealer. Dealers can then use their floor plan line of credit to purchase inventory from auctions and other inventory sources. If a dealer purchases a car on a floor plan, takes it back to their lot and it doesn’t sell within a contractually determined number of days, dealers are charged a small fee. As a dealer sells their inventory, they pay back the original loan.

With a floor plan, the initial investment needed to buy a particular unit is a fraction of the vehicle’s actual purchase price. As soon as that vehicle sells to a consumer, floor planning dealers have the ability to immediately realize profits, pay back the initial value of the loan plus interest and fees, and hve the flexibility to keep their funds working for their dealership.

You may not believe it, but most car dealers do not pay cash for the vehicles on their lot. Even smaller dealerships can have an inventory of vehicles that they acquired with funds from their floor plan. representing. Rather than offering loans for each individual vehicle purchase, most floor planning companies supply dealers with a revolving line of credit that they then use to buy vehicles from Dealer auctions.

Should you use a Floor Plan ? – Pros and Cons

While Floor planning (flooring) vehicles is a way to acquire inventory, it can have a strong impact on your license if payments (curtailments or payoffs) are not made on time. Curtailment schedules vary by floor plan providers, but they generally range from 5%-20% of the original loan proceeds on each vehicle every 30/60/90/120 days. If curtailments are not made or the dealer enters into default on their obligations, floor plan companies will take action to minimize their exposure. Those actions include attaching to the bond (not all states require dealers to have bonds), repossessing the collateral, and other collection efforts.
So, of course you know that the longer your inventory sits, you are burning money.  A general rule of thumb is that, once a unit moves past the 60 day point, you should start thinking about dumping that car in the Auction or something and pay off that financing. Depending on the size of your Dealership you can hold cars longer or for less time. The depending on the amount of time you had your license (and even your personal and/or business credit) will have an impact on your actual loan rates.

Lets take an individual Case here. Lets assume you brought one car on your Dealership Floor Plan. Take a look at what could be the financial impact:

Say you borrow $15,000 to buy  a late model import. You hope to sell it for $18-$20K and net $3.5-4.5K profit.  Well just at 5% (floor plan loan rate) you are looking at $750 to be due within 30 or 60 days depending on the terms of your Floor plan.  We have not factored in your overhead (fixed expenses) that every vehicle in your inventory has contribute to. So you can easily slice a third of your profit or more from your profit margins if you cannot sell your cars fast enough (within 30 days)

My opinion is use Floor Plan for the most in demand vehicles that have a higher profit margin …not ordinary or average cars. I would strongly urge you to have a paid marketing budget specifically for the Floor Plan cars which have to sell faster.  Your target should be to sell a car in 30 days or less . And last but not least, have some kind of exit planned for each vehicle if it does not sell within 45 days. This gives you enough time to generate the funds for the car and pay off the loan.

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