The automotive industry is very unique in that it is one of the few industries where commercial loans are abundant and relatively easy to qualify for. Whether you are just starting out or looking to grow your business, it is likely you will be able to find the capital needed to stock your dealership. Yet while there is a good chance you will be able to acquire a floor plan line of credit, the size of that line of credit will vary depending on your business needs and overall portfolio snapshot.
Floor Plan 101: The Basics
First and foremost, to qualify for a floor plan, you need to have credit. Specifically, you should have a history of utilizing and repaying debt. Bad credit and hiccups on credit history aren’t always deal-breakers, but they will likely reduce the amount for which you qualify. Additionally, there is a good chance that credit issues will have a negative impact on pricing structure. The good news is that over time, with good performance and the adherence to the terms and conditions, it is possible to eventually overcome these setbacks.
It is also important that you are not over-extended. If your credit cards are all maxed out, that is a potential red flag even if you have not paid late. Handling your available credit responsibly is essential, so be sure to maintain a substantial amount of available credit.
How to Use Your Floor Plan
It is relatively easy to use your floor plan line of credit. Not only do NAAA-affiliated auctions accept most floor plan companies, but the lender handles much of the back-door operations, leaving you to just worry about one thing: purchasing inventory.
On auction day, after checking in at the auction, you will want to go to the appropriate department at the auction to check your credit availability with your floor plan lender(s). Once you are done bidding for the day, take your blocked tickets to the auction check-out, where you will notify the auction which purchased units you wish to floor plan. From there, your floor plan company will take care of the rest.
Growing Your Business
If you are looking to grow your business through the addition of a floor plan line of credit, there are several other items that will play into the lending decision above and beyond your personal credit history. Trade references, business credit, equity, cash and the overall health of your business all come into the picture and become increasingly more important in your effort to acquire more floor planning dollars.
The same principals apply if you are looking to increase your existing floor plan credit limit. However, there is another component that could either be in your favor or held against you: performance. You can rest assured that commercial lenders have learned a lot about managing and mitigating risk, especially over the last several years. It is crucial that you closely adhere to your lender’s terms and conditions. NSF’s, late curtailments, slow payoffs and bad audits will inevitably prevent you from gaining the additional buying power you need to grow your business. Stay on top of managing your accounts and you will improve your chances of increasing credit limits.
“Trade references, business credit, equity, cash and the overall health of your business all come into the picture and become increasingly more important in your effort to acquire more floor planning dollars.”
Pitfalls to Avoid
Floor plan companies are discretionary lenders, and it should be understood that your account is constantly being underwritten. Changes in your performance or credit profile will not go unnoticed. Commercial lenders have learned a lot about managing and mitigating risk, especially over the course of the last five years. It is crucial that you closely adhere to your lender’s terms and conditions. NSF’s, late curtailments, slow payoffs, and bad audits will inevitably prevent you from gaining the additional buying power you need to grow your business. Stay on top of managing your account, be honest and communicative, and you shouldn’t have any problems.
All of this ties into the overall viability of your operation. A thriving business should be building equity while reducing debt. As a thriving dealer principal you should be building net worth, not acquiring debt to keep your business above water. If your business isn’t building and growing, then you probably shouldn’t be seeking more floor plan dollars. More flooring won’t turn around a failing business model. You would just be adding more fuel to the fire. Instead, focus on perfecting your operation. However, if your business is building equity and turning a profit, having some additional buying power can surely help you shift into the next gear.