It can be incredibly satisfying owning all the cars on your dealership lot. You won’t owe fees, interest or curtailments, and when that vehicle sells, those funds go directly into your account. However, it’s crucial to consider the full cost of restricted cash flow and everything else that entails fully owning an entire lot of cars. When dealers floor plan vehicles, they can lessen the immediate cost of inventory and improve overall cash flow.
It takes funding to start your dealership, and cash flow to help maintain your dealership. Let’s say you have a smaller lot with approximately 20 cars. If each car on average costs an average of $6,500, that’s $130,000 in funds tied up in vehicle inventory, not including team member salaries and other overhead.
What could those funds be doing if they weren’t tied up in inventory?
With an auto floor plan, dealers can purchase inventory without utilizing a large portion of savings. Until the car is sold, dealers only owe minimal payments. Once the car is sold, dealers can immediately pay off the loan amount and gain profits while keeping their funds liquid for overhead and other expenses.
You can’t always convert cars to cash
Dealers will occasionally need a quick cash infusion. Often, dealers that own their inventory will say that they can always take inventory back to auction or to a wholesaler if there is a need for additional funds.
Part of having a comprehensive inventory strategy means wholesaling vehicles at auction, and it can be an important part of your aged inventory exit strategy. However, if you are relying on vehicles to sell at auction in order to get necessary funds, you may want to consider alternate options.
There are several hurdles dealers must overcome just to break even on a car’s initial purchase price. If the vehicle has been sitting for a while, depreciation will take its toll. It requires additional time and effort to take inventory back to auction, plus buy and sell fees will take a small percentage out of any sale price.
By using auto dealership financing, dealers can offset the full costs of inventory. Instead of paying full price when the car is purchased, dealers can use their line of credit and leave dealership savings available for unexpected expenses or emergencies.
Even though it may seem counterintuitive, the cost of using cash can hold your dealership back from accomplishing its goals. Floor plan vehicles to stock your lot and take advantage of the flexibility and the improved cash flow a line of credit offers.