Dealers rely on fresh inventory and reliable financing to ensure their dealership remains operational. Every dealer has their own preferences and opinions on the type of financing they want to use to purchase inventory. Some dealers prefer to use the cash they have on hand, others use standard bank loans, and others prefer to use a floor planning finance solution. Each type of capital has its own set of benefits and disadvantages.
Cash
Many dealers will use cash to purchase inventory. Dealers like this option because it allows them to own the car outright. Their purchased inventory doesn’t collect interest, and there aren’t many other fees associated with buying a car with cash.
However, using cash has quite a few disadvantages. Dealers don’t often consider what it totally costs to use their own cash for purchasing inventory. Many automotive dealers only have a set amount of cash on hand, and that cash is often earmarked for other expenses beyond inventory, such as dealership payroll, facilities and marketing. After taking care of those expenses, how much cash is really left to purchase the amount of inventory needed for dealership profitability? How much is really left over to re-invest in the business?
Independent auto dealers are also incredibly busy people. Their time is valuable, and purchasing inventory with cash can take up a lot of time with administrative tasks. Dealers will go to auction, bid and win a car, and then have to go pay for their new piece of inventory. If a dealer is paying with cash, there’s typically extra paperwork to complete while at the auction, and extra monitoring to ensure their payment clears.
In addition, vehicles are a depreciating asset. Any car a dealer purchases will eventually depreciate in value if it sits on a dealership lot long enough. If that vehicle was purchased with cash, that initial cash investment will also depreciate. If the car doesn’t sell for a while, the dealer’s options are pretty limited. Their capital is tied up in the vehicle so they can’t invest in another unit. In addition, the dealer isn’t likely to make back their initial investment due to holding costs and additional depreciation.
Standard Bank Loans
Some dealers prefer to use a bank loan to purchase vehicle inventory. Though dealers can often acquire the needed amount of capital from a bank, there are some drawbacks to a standard business bank loan.
With a bank loan, there isn’t any incentive for dealers to sell a vehicle or profit quickly. If there isn’t any incentive to sell vehicles, the inventory may just sit on their lot, and they can run into the problem of aged inventory. Aged inventory depreciates and won’t be worth the price the dealer initially paid for it, so even if the vehicle sells, it will sell at a loss to the dealer. In addition, if the cars on a dealer’s lot don’t sell before a loan payment is due, an automotive dealer could find themselves in a tricky situation.
With a bank loan, dealers will also need to take care of the numerous administrative tasks that come with purchasing automotive inventory.
Floor Planning Finance Solutions
Floor planning finance solutions are one of the easiest ways for dealers to purchase inventory, and one of the most flexible ways to free up dealership cash flow.
Dealers only have a set amount of cash on hand to pay for various expenses. With a floor planning finance solution, dealers don’t have to use the money they have on hand to pay for inventory. This allows for additional flexibility for dealers who need to pay for other expenses and want to grow and improve on other parts of their business.
This flexibility also gives dealers more options to handle aged inventory. If a vehicle hasn’t sold in the amount of time a dealer wants that inventory to sell, there are more options available to a dealer than if they had bought that inventory with cash. With a floor plan finance solution, a dealer can pay a small amount of the car off at a time, extend a vehicle or they can buy down their depreciation over a period of time.
In addition, floor planning finance companies are uniquely attuned to the needs of dealers. Beyond offering capital for inventory, there are other services offered to alleviate some administrative needs of auto dealers. For example, utilizing a floor plan means that a dealer doesn’t need to fill out much additional paperwork at an auction in order to complete a purchase. Other services to offload administrative tasks are also offered to a number of dealers. These services include records management, title services depending on a dealer’s state, collateral protection and state-of-the-art online and mobile account management tools.
Though it might seem like a better move to purchase inventory with cash or through a standard loan, a floor planning finance solution will often increase a dealer’s purchasing power and improve the flexibility of the capital they have on hand.