Often confused with building layouts, a “floor plan” is essentially a short term loan that car dealers can use to stock vehicles on their lots. Though this is a simplified definition, what is floorplanning exactly and how can a floor plan work to improve dealership cash flow?
Like a loan, a floor plan is a line of credit made specifically for auto dealers to fund inventory purchases from auction sources, trade-ins and other non-auction sources. Once inventory is purchased, dealers pay back the original loan amount plus interest and minor fees over the course of their individually contracted terms.
Every floor planning dealer has individual contracted terms personalized for their dealership. Floor plans are typically composed of an interest rate, term periods, floor plan fees and curtailments/extensions. For example, a dealer may have a term plan where they need to make a minor payment composed of those items at 30, 60, 90 and 120 days.
These minor payments at periodic intervals ensure that a dealer doesn’t have to purchase vehicles in full in cash, and assures the lender of a dealer’s ability to make payments.
How can a floor plan help improve dealership cash flow?
Some dealers prefer to use dealership savings to purchase inventory. However, many dealers find there’s sometimes just not enough funds to fuel dealership growth.
Let’s explore this concept with an example. If a dealer sells 6 cars per week with an average cash in deal of $6,750, each week our example dealer needs $40,500 just for inventory, let alone additional expenses. A customer’s lender may not always pay quickly either, further compounding the amount of cash needed to keep the business running.
Additional cash flow helps to fuel dealership growth. One of the biggest benefits of a floor plan is that dealers don’t have to use their funds on hand to purchase inventory to keep their lot stocked. This leaves dealership savings free to pay for expenses and expand other parts of the business.
With a floor plan, the funds that were previously used to purchase inventory, can be used to pay for expenses and grow other parts of the dealership. Additionally, those funds could be used to hire more staff, improve marketing and advertising efforts or improve service operations.