Dealer Floor Plan Financing Explained

In the automotive industry, the terms floor planning, stock finance, and floor plan financing are frequently used.

Floor plan finance is a form of funding used by organisations such as franchised and independent motor dealers, agricultural equipment vendors, materials handling equipment dealers, and similar.

This form of funding is a way of using revolving credit lines from specialist finance companies to ensure a regular flow of cash used to finance inventory. Floor planning costs can run into substantial amounts of money for a big multi-location dealer with large inventories.

These loans are typically secured against stock such as new vehicles before they are sold or leased to the retail customer.

How Does Floor Plan Financing Work?

Floor plan financing is a revolving line of credit that allows the borrower – for example, car dealerships – to obtain financing for the goods they sell. These loans are made against a specific piece of collateral (i.e. motor vehicles, motorbikes, earthmoving machinery, etc.).

When the dealer sells each item of stock, the loan advance against that piece of collateral is repaid. This form of funding is also known as unit stocking finance, and the lender has title to the vehicle until it is sold on.

This has become increasingly popular in recent years, as this form of floor plan financing allows dealers to manage profit margins, cash flow, and stock levels more efficiently by adding and removing vehicles from their funded portfolio at any time.

Finance firms that execute well on floor plan financing initiatives are those that of course are properly funded; they also know how to collateralise 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 floor plan financier registers liens on the vehicle, and when the vehicle is sold that lien is removed. The finance firm, of course, profits from the ability to charge the dealership interest over that 30-90 day period.

Naturally, this process is cyclical and repeats itself continuously. Lenders must have reasonable confidence in the financial viability of the dealer; more experienced and financially solvent dealers can naturally command larger floor planning facilities.

Dealers also are subject to rigorous audits of the inventory. The lender wants to know the car is still there and hasn’t been sold and the money borrowed not repaid. Therefore VIN (vehicle identification numbers) are checked regularly by finance company personnel, the insurance is validated, and random inspections are common.

Overall the auto floor planning facility is a key aspect of the automotive market and is a significant benefit to both new and used car dealers alike.

Benefits of Inventory-Based Financing

Floor plan financing firms are particularly well-equipped to assist auto dealers in need of funds. Some dealers may be able to use their cash reserves or a bank line of credit to purchase inventory, but specialty finance companies can provide additional benefits.

Here are some of the benefits floor plan financing can bring to car dealerships:

• Increase flexibility with terms of payment
• Request credit line increases for difficult times
• Expand as needed to support business growth
• Improves cash flow and frees up capital to invest elsewhere in the business
• Attractive rates which might be cheaper than alternatives
• Point of sale consumer finance training, plus free point of sale marketing materials for customers
• Inventory financing programmes can provide longer and more adaptable payment terms
• Increased buying power to enable larger inventories

How to Find Dealer Floor Plan Loans

Many unit stocking plans appear to be the same on the surface, so it’s worth taking the time to thoroughly examine them to ensure you’re receiving the best deal – and that doesn’t necessarily mean just the most competitive rates.

Here are a few additional questions it will pay to consider 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?

Whatever type of finance works best for a particular dealership group, maintaining the confidence of the lender is essential.

Ensuring that stock inventory audits are frequent, accurate and provide the level of detailed information required by funding providers is central to this.

If you are looking for a way to effectively manage your inventory, CheckVentory offers stock management and inventory intelligence tools to help companies around the world run their business as efficiently as possible. Read more about CheckVentory Audit for Dealers here.