Shrinking margins put increasing pressure on dealers to buy in-demand vehicles at reasonable prices, and sell inventory faster than ever. Some dealers believe cash is the most economical way to ensure dealership profitability. However, they may not have the best understanding of how floor plan financing can work to improve dealership revenue.
Often, the combination of inventory acquisition costs, dealership turn times and individual holding costs for vehicles can dictate a dealer’s overall profitability. Once holding costs, inventory acquisition costs, turn time and depreciation are factored in, there’s a very real possibility the profit a dealer was expecting for a particular vehicle will be significantly depleted, resulting in stifled dealership cash flow.
An average dealer’s typical holding costs will vary based on a number of factors. According to the National Auto Dealer Association (NADA), the cost of keeping a used car in inventory is approximately $28 per day. So let’s assume that it costs our dealer $28 per day to keep a vehicle on their lot. Let’s also assume it costs our dealer $10,000 to purchase the vehicle, and they could potentially sell it to a consumer for $12,000. This dealer can only expect to make a maximum of $2000 in profits. If the car stays on their lot for 30 days, after calculating only holding costs, the dealer will have essentially spent an additional $840 just to keep the car on their lot! In total, this dealer will spend $10,840 just to let the vehicle sit on their lot for 30 days. That only leaves approximately $1160 of profit on the table to go buy more inventory, or pay for any other necessary dealership expenses.
Repeat this same scenario, but make minor adjustments to the inventory acquisition costs, profit per vehicle, holding costs per day, turn times and the costs involved to purchase additional inventory. After paying the bills, how much additional inventory could this example dealer realistically purchase if they paid for all inventory with cash? How is this dealer going to be able to effectively grow their dealership?
Every day dealers go out of business because they don’t have enough funds to effectively manage and sustain their operations.
Let’s see what happens when a dealer in the same scenario incorporates a floor plan into their dealership.
It costs $10,000 for a dealer to acquire a particular piece of inventory that could retail to a consumer for $12,000. However, instead of using dealership funds, the car is purchased with a floor plan line of credit. The $10,000 in dealership cash that would have been used to purchase the vehicle stays in the dealer’s bank account. Until the vehicle sells to a consumer, our dealer can use the extra $10,000 in their savings to potentially hire more people, grow operations or improve facilities.
Every dealer has different contracted terms, but for this example, let’s say a dealer’s first floor plan payment is due 30 days after acquiring the car, which is typically a small fraction of the initial vehicle cost. All in at this point in time, the dealer only “spent” $840 in holding costs plus a little extra for that first floor plan payment.
To compare, the dealer without a floor plan spent $10,840 in dealership funds just to let the vehicle sit on their lot.
If the vehicle sells for $12,000, the dealer using a floor plan is able to immediately realize profits, pay back the initial value of the loan plus fees, and had the added ability to use the $10,000 in dealership funds for other expenses the entire time the vehicle was on the lot.
Repeat this same situation across a number of different vehicles, and alter the amounts needed to acquire vehicles, holding cost per day and turn time. With a floor plan, there’s certainly a lot more breathing room for dealers when it comes to cash flow.
With a NextGear Capital floor plan, you get the buying power needed to succeed, and a variety of solutions made to complement current operations. Competitively priced terms and rates made to grow with your dealership ensure you’re getting the best available financing.
Additionally, with over 1,000 live and online auction sources, you can use your line of credit when and where it’s most convenient. Join the 23,000 dealers that have selected NextGear Capital as their floor planning partner.
Reach out to your local NextGear Capital representative, or apply for credit!