Dealer floor plan providers are typically the easiest way to access additional capital for a car dealership. However, access to the right amount of capital to purchase inventory is essential for a dealership’s business to run efficiently. Not having enough, or even having too much capital on hand can sometimes lead to problems for a dealership down the road.
Not Enough Capital
Not having enough capital is a common problem for automotive dealers. A lack of capital often means that a dealer is not able to purchase enough inventory to sustain their dealership. The lack of cash flow means that money is tied up in inventory and is depreciating, and the rest of it is often tied up in overhead. When dealers don’t have enough capital they will frequently turn to dealer floor plan providers to bridge that capital gap.
The line of credit initially given to a dealer by a floor plan company depends on a number of factors. However, a good floor plan company will continually work with a dealer to make sure they always have the appropriate amount of capital. However, on occasion, a dealer might have too much capital available.
Too Much Capital
Having too much capital can also lead to a number of problems. If they are not careful, too much capital could put dealership buyers in a position where they make bad decisions. They might not carefully purchase inventory tailored to their lot simply because they have the capacity to purchase a greater number of units.
Having excess inventory that doesn’t address market demand can cover up for sloppy purchasing. Which in turn, can make it a difficult problem to identify and resolve.
An excess amount of inventory can also cause the dealership sales team to become lax, since the extra inventory reduces the focus on aged units.
Dealerships stay accountable when they use the correct amount of capital. At NextGear Capital, we typically recommend a 70/30 mix of a dealer’s floor plan and cash on hand, respectively. A balanced amount of capital means a dealership has enough on their floor plan to purchase new inventory, and enough cash on hand to ensure overhead is covered.
Keeping this balance is essential for dealers wanting to operate a profitable and efficient dealerships. Dealers who are concerned about their current floor plan balance should contact their dealer floor plan providers to ensure a balanced amount of capital.