Cash flow is the lifeblood of any business, but this especially rings true for automotive dealers. Used car dealers have to consistently balance vehicle sales, the funds they have on hand and the inventory they’re able to purchase and have available on their lot. Compared to using cash, a flooring financing plan can make that balance easier.
Buying vehicles with cash has a lot of perceived benefits. The vehicles on the lot are owned in full, interest and fees aren’t collected, and all earnings after a car sells go directly into the dealership’s account. Despite that, many dealers don’t consider the full cost or potential floor plan mistakes of using dealership funds to buy inventory.
One of the top reasons dealers use a floor plan financing line of credit is to improve their overall cash flow. Most dealers have an amount of funds set aside to handle a variety of operational expenses. However, if a dealer also has to use those funds to purchase inventory, it can be difficult to purchase enough vehicles to sustain current business.
By using a floor plan to purchase inventory, dealers have the ability to use their cash-on-hand for other expenses. For example, instead of using $12,000 cash to purchase two $6,000 vehicles, dealers can use that $12,000 on hand to make other improvements to their dealership services or other offerings.
Another drawback of using dealership savings to purchase vehicles is that all funds invested in the vehicle aren’t liquid. If the car sits for months without being sold, there aren’t simple options to get those funds back.
With a floor plan, funds can be used to help build the dealership instead of parked in inventory. When dealership savings are tied up in inventory, those funds depreciate along with the value of the vehicle. Even if that aged inventory is sold back at auction or to another dealer, the chances of getting the original purchase price back aren’t guaranteed. Especially considering the logistics involved in any attempts to recoup costs.
A key benefit of a flooring financing plan is that a dealer’s personal investment is delayed until a contractually determined number of days. That fee is a minor fraction of the vehicle’s purchase price. The full value of the original loan plus any additional interest or fees aren’t due until the vehicle is sold. Once that happens, dealers can immediately pay off the original loan amount plus interest and fees, and realize additional profits without having to front funds to acquire the vehicle!