Floor plan financing is a specialized form of vehicle inventory financing that enables independent car dealerships to access the capital they need to purchase and stock their lots.

With floor planning, dealerships can acquire a wide selection of vehicles, making them readily available for customers to test drive and purchase. The lender retains the titles of the vehicles until they are sold to end-users.

Note: When researching floor plan companies, make sure to ask about the title management process. You should be able to view your titles in real time, receive overnight title returns and manage the whole process with ease. Here is how we do it.

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Falls Motors
Wichita Falls, TX

When cars are sold, the dealership pays back the original balance plus interest. This allows dealerships to keep a revolving supply of inventory without having to make large upfront purchases or drain their entire cash flow.

Floor plan financing works similarly to a revolving line of credit.

It is a type of short-term financing designed to help dealerships cover the cost of their inventory while also allowing them to adjust their stock without incurring a major financial burden. When a dealership wants to purchase a vehicle, they send a request to their finance company. When approved, the finance company will release funds for the vehicle purchase.

The finance company then holds the title to the vehicle. As the dealership sells the car, they pay back the original balance plus interest and then take out additional capital to buy new inventory.

Floor plan financing offers several benefits to independent dealerships.

By using a line of credit, dealers can maintain a healthy cash flow while also stocking a diverse inventory. This helps dealers attract a wider range of customers, as well as respond quickly to changing market trends.

While floor plan financing can be a helpful option for independent car dealerships, there are some risks involved.

Dealerships who struggle to sell their inventory quickly may be at risk of accruing higher interest rates or other charges.

Some non-Kinetic dealers have also expressed frustration with hidden or excessive admin and audit fees.

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While floor plan financing offers numerous advantages, there are important factors that dealerships should consider before implementing this financing option.

Let’s delve into these factors:

1. Responsible Inventory Management

Dealerships must exercise responsible inventory management to ensure they do not overextend their borrowing capacity. It is crucial to purchase inventory in proportion to sales figures and avoid buying more than can be sold. Overextending inventory can lead to difficulties in making loan payments and raise concerns with lenders about the stability of the business.

3. Managing Cash Flow

While floor plan financing can improve cash flow by freeing up funds for other expenses, dealerships must exercise prudence in managing their finances. It is crucial to avoid situations where multiple bills mature simultaneously, potentially leaving the dealership unable to meet its financial obligations. Effective cash flow management ensures financial stability and prevents liquidity issues.

4. Regular Collateral Audits

Dealerships should ensure that lenders can easily verify their inventory during regular collateral audits.

When lenders encounter difficulties in verifying inventory, it raises concerns about the dealership’s ability to fulfill its loan obligations. Dealerships should prioritize maintaining an accurate and accessible inventory record.

Here are 5 ways to have a better audit experience.

5. Timely Inventory Turnover

In the auto retail business, the ideal timeframe for vehicle turnover is within 45 days. As time progresses, profit margins decrease, making it crucial to sell vehicles promptly. If a particular vehicle remains unsold for an extended period, dealerships may need to consider auctioning or selling it at a reduced price to avoid inventory stagnation and maintain a healthy turnover rate.

When seeking floor plan financing, dealerships should choose a lender with experience in working with auto dealerships. In other words, there are some obvious, and maybe less obvious, benefits of floorplan financing compared to traditional banks.

It is crucial to research the lender’s track record in floor plan lending and understand their operational processes for audits, reporting, and payment procedures.

Building a strong relationship with the lender based on trust and transparency is essential for long-term success.