Purchasing inventory with cash on-hand is often a preferred method for a number auto dealers. Sometimes owning each and every vehicle on your lot can seem appealing, however, the flexibility of an auto dealer line of credit can provide many more options than just cash alone.

Purchasing inventory with cash can lead to reduced cash flow
Cash flow is essential to maintain dealership operations. At some point, every dealer has to account for dealership expenses and overhead in addition to the cost of acquiring inventory. Dealers need to realize that when they purchase inventory with the capital they have on hand, they’ve locked up part of their cash flow to that inventory. They’ve tied up the use of their funds, which means they can’t use their cash for other expenses like payroll, marketing and dealership maintenance.

It’s difficult to use money tied to depreciating dealership inventory
Vehicles are a depreciating asset. Over time, they lose value. The longer a vehicle sits on an auto dealer’s lot, the more it will depreciate, and if a dealer purchases that vehicle with cash it means that their initial investment will also depreciate. If the car sits long enough, the vehicle will eventually be worth less than what the dealer originally paid for it. Even if that vehicle is sold down the road, a dealer could likely lose money on that particular inventory purchase based off of holding costs alone.

Depending on a dealer’s contracted terms, an auto dealer line of credit allows them to make a minimum payment after a contractually determined number of days. The additional flexibility of the minimum payment means that a dealer’s dollars aren’t depreciating while a car sits on the lot.

Purchasing inventory with cash is always an option for auto dealers. However, discerning dealers should carefully consider what that cash could be doing if it wasn’t tied to dealership inventory. How could that extra cash be used to grow and improve your business?