Dealers thrive in a flexible, fast-paced environment, and dealership capital needs to be flexible as well. Though some dealers might think buying vehicles with cash is the most flexible option for investing in inventory, there are some key benefits that a car dealership floor plan offers that auto dealers should consider.
Floor plans free up dealership cash
Every dealership needs cash on hand for various expenses. For the most part, there’s a set amount of money a dealer has on hand at a time. In addition to paying for inventory, dealers use this cash to pay for employee salaries, facility maintenance, marketing and advertising and in addition to a number of other operating expenses.
Dealers that have a floor plan don’t have to use their cash to purchase inventory. The cash that would originally used to purchase inventory can now be put towards other expenses. This means dealers can focus those monetary resources on expanding and improving other parts of the business. For some dealers, this means hiring more help. For others, it can mean opening up a brand new location.
Dealers don’t have to convert inventory to cash
Using a car dealership floor plan ensures that a dealer can have extra capital on hand when it is needed. If a dealer only uses cash to purchase inventory, a dealer can only get that cash back if they sell the vehicle, either to a consumer or through other channels such as an auction. Selling a vehicle to a consumer for extra cash takes time, and sometimes dealership expenses can’t wait. In addition, there are extra fees often associated with selling a vehicle at an auction. A sell fee on a $20,000 vehicle within the first 60 days can easily be on par with a floor planning fee. Is it really worth the hassle of converting inventory to cash at auction every time your dealership needs extra money?
In addition, any inventory acquired that doesn’t sell will eventually lose value. If a dealer purchases inventory with cash, that means their cash also loses value. If a dealer wants to convert inventory to cash, it is highly likely that the value of that inventory, and in turn, the amount of cash a dealer can get back from the vehicle will be less than expected.
With a floor plan, if a vehicle hasn’t sold after a contractually determined number of days a dealer only has to pay for a small portion of the car’s value. Once the car sells, the dealer pays back the amount they initially bought the vehicle for.
Dealers require flexibility from their capital. Though it might seem more flexible to purchase inventory with cash, the dealers that use floor plans will often increase their purchasing power and improve the flexibility of their working capital.