The terms “floor planning” and “floor plan financing” get thrown around pretty frequently in dealership and auction circles. But what do these terms really mean and how does floor plan financing work?
To put it in the simplest terms, floor planning and floor plan financing work almost like a credit card made solely for purchasing vehicle inventory.
Credit cards are issued by a bank to an individual. Individuals can then buy personal goods with the money loaned from the bank. The money borrowed from the bank collects interest, and one has the choice to either make a minimum payment or pay off the balance in full when the bill is due.
So how does floor plan financing work?
Much like a credit card, a floor plan financing company extends a line of credit to a car dealer. Dealers can then use their floor plan line of credit to purchase inventory from auctions and other inventory sources. If a dealer purchases a car on a floor plan, takes it back to their lot and it doesn’t sell within a contractually determined number of days, dealers are charged a small fee. As a dealer sells their inventory, they pay back the original loan.
With a floor plan, the initial investment needed to buy a particular unit is a fraction of the vehicle’s actual purchase price. As soon as that vehicle sells to a consumer, floor planning dealers have the ability to immediately realize profits, pay back the initial value of the loan plus interest and fees, and had the flexibility to keep their funds working for their dealership.
How does floor plan financing work specifically to benefit auto dealers?
Floor plan finance companies are uniquely attuned to the needs of auto dealers. Using cash or a bank line of credit to purchase inventory can work for some car dealers, but many floor plan financing companies offer a variety of dealer-specific benefits. In addition to freeing up the cash a dealer has on hand, other floor plan financing benefits can include extra flexibility in terms of paying off a particular piece of inventory, payment extensions and credit increases if necessary. Other services are also frequently offered which can include records management, title services depending on the dealer’s state, collateral protection and state-of-the-art online and mobile account management tools.
Though floor plan financing can seem like a confusing concept, in practice it can be an extremely beneficial business strategy for automotive dealers.