How Regular Floorplan Audits Protect Dealers and Lenders

Inventory is the lifeblood of an auto dealership. Having the right vehicles on the lot to showcase to customers is critical for sales. Most dealerships rely on floorplan financing to fund the acquisition of their vehicle inventory. This involves receiving a line of credit from a lender to purchase vehicles, with the vehicles themselves serving as collateral on the loan.

Floorplan financing provides dealers with the capital required to stock their showrooms with the latest makes and models. With floorplan lines, dealers can acquire inventory without tying up large amounts of capital long-term. This allows for greater flexibility and liquidity.

While floorplan financing is essential for stocking dealerships, it also comes with inherent risks for both dealers and lenders. To mitigate these risks, regular floorplan auditing is a necessity.

In this article, we will explore what is involved in a typical floorplan audit. We’ll look at the processes external auditors and internal teams follow to verify inventory records and what they check for. For lenders, effective audits are vital to minimize cases of fraud and loan loss.

What is Involved in a Floorplan Audit

A floorplan audit is an examination of a dealership’s inventory financing records and physical vehicle stock. The purpose is to verify the accuracy of the dealership’s records and ensure compliance with the terms of the financing agreement.

During an audit, auditors will review all documentation related to inventory financing such as:

• Inventory records/reports

• Vehicle purchase orders

• Invoices from manufacturers/auctions

• Titles and ownership documentation

Auditors will trace records for each vehicle to confirm existence and ownership. Physical inspection and counting of stock is conducted to confirm vehicles listed on financing statements match actual on-hand inventory. Technology such as CheckVentory Audit helps streamline this process.

Audits also examine internal controls around inventory management and financing processes. This review helps identify potential weaknesses or gaps where errors or fraud could occur.

Floorplan audits are typically conducted quarterly or semi-annually at minimum. Larger dealerships may be audited monthly. Surprise audits may also be performed outside normal schedules to provide additional assurance.

Watch Out for Fraud

While most dealerships operate ethically, auditors must remain vigilant. Unfortunately, there are cases where dealers attempt to cheat on audits to hide non-existent inventory or sell vehicles without paying lenders – known as selling out of trust. Some common inventory frauds include:

Double flooring – obtaining financing for the same vehicle from multiple lenders. Allows over-borrowing against collateral.

Phantom vehicles – falsifying records to indicate non-existent vehicles are in inventory.

Selling out of trust – selling a financed vehicle without repaying the floorplan loan. Sale proceeds are often diverted.

Falsifying documentation – altering documents, inflating purchase prices, duplicating invoices.

Misusing funds – using inventory financing for purposes other than acquiring approved stock.

The Impacts of Inaccurate Auditing

When fraudulent activities go undetected through inaccurate floorplan auditing, it can have major financial consequences:

• Lenders can face significant losses from loans issued against non-existent collateral or inventory sold out of trust.

• Ongoing fraud may lead lenders to force early repayment of floorplan loans or repossess dealer stock

• Major losses can push weaker dealerships into bankruptcy and closure.

• Dealers may see floorplan financing lines decreased or revoked in response to rising lender losses.

Regular audits that accurately identify and resolve discrepancies are critical for sustaining floorplan financing and a healthy auto industry.

The Benefits of Automated Floorplan Auditing

Traditionally, floorplan auditing has been a very manual process relying on physical inspection and paper documentation. This leads to potential errors and significant administrative workload for dealership staff facilitating audits.

Many dealerships are adopting automated inventory auditing systems to modernise the process. Solutions like CheckVentory’s digital audit platform provide benefits including:

• Real-time visibility of floorplan collateral for lenders through live inventory tracking.

• Error reduction by eliminating manual processes and paper documentation.

• Faster audits and funding approvals using digital tools and data.

• Freeing dealership staff time from audit preparation and assistance.

• Detailed custom reporting on audits for lenders and dealerships.

• Tighter inventory controls and lower risks of fraud or noncompliance.

Regular floorplan auditing is essential for both dealerships and lenders to reduce risks in inventory financing. By verifying inventory records match actual stock and spot-checking for potential fraud, audits provide assurance to lenders while helping keep dealers compliant.

With in-house resources often stretched thin, many dealerships are finding value in partnering with companies specialising in digital auditing tools and services for greater efficiency and transparency.

To learn more about how automating floorplan auditing can benefit your dealership or lending portfolio, contact CheckVentory. This digital audit platform streamlines the inventory verification process while providing lenders with real-time tracking and custom reporting.