Beginning to purchase your inventory using dealer floorplan financing (which you may have also seen called “floor plan financing”) can be a major step for a dealership. So what should a dealer be thinking about before flooring their first vehicle? Let’s take a look at some considerations before deciding whether or not floorplanning is right for you.
Like any loan, a dealer floorplan must be repaid at some point, and in some circumstances repayment could create more of the cash flow issues the dealer hoped to solve with the loan in the first place. A dealership with a baseline of good credit and available finances—including current expenses and revenue from sales—will find it much easier to avoid this.
It’s important to have a full understanding of the financial commitment being made when contracting with a floorplan company. In short: will your dealership be able to make payments on time?
The auto finance companies that offer floorplan lines of credit to dealers each have a set of criteria a dealership must meet to qualify for financing. Your credit score, your minimum inventory levels, and your general business history play a role in determining eligibility.
It’s a good idea to know whether or not you’re talking to a lender that matches up with your needs and qualifications. And if not, you’ll know in advance, which allows the time to make preemptive changes in a measured way that supports the healthy growth of your business.
A variety of floorplan financing options are available to dealers, even from a single floorplan company. The terms of these loan types will vary, and it’s important that a dealer fully understands all the terms before signing a contract. The length of the loan, the interest rate, the frequency of payments, events like curtailments and required principal paydowns, and the types of vehicles that can be floored are all usually part of the contract between borrower and lender. The terms you’re agreeing to should be manageable within your financial plan.
There are a couple of reasons why this is important. Proper inventory management is key to ensuring that your dealership is generating the revenue needed to make timely payments on your floored vehicles. That means it can be helpful to have a solid plan in place for bringing in fresh inventory and managing the pricing, marketing and sales strategies, and market knowledge and research for your lot. More than anything, you want to purchase vehicles your customers want to buy, and don’t be afraid to move on from aged inventory.
Also, the types of vehicles—and the types of inventory sources—that are compatible with a dealer floorplan are unique to the specific contract. If your dealership thrives on inventory you purchase outside the auction, make sure non-auction purchases can be floored. Otherwise, you may find it harder to get your money’s worth.
Finally, things change. Market conditions can affect the pricing of vehicles—and your dealership as a whole—and unexpected expenses can affect your ability to consistently make payments.
Dealers should consider contingency plans to mitigate these possibilities and ensure the long-term success of the dealership—and repayment of the loan. Some floorplan companies can even help with this, offering services that can get dealers through a “rainy day” like principal paydown extensions and more. It’s important to know your options before risk becomes reality.
The success of any financing relationship begins long before the dealer and floorplan lender sign on the dotted line. Before you take out a floorplan line of credit, make sure you’ve considered all the factors involved to help prepare your dealership for success.
Disclaimer: Dealers should consider all factors prior to agreeing to a floorplan and consult with their own advisers to make an independent business decision by reviewing the risks and advantages prior to signing any agreement. These descriptions of floor plan terms are general and actual terms and conditions of a floorplan are subject to the final written agreement between a dealer and its lender. AFC does not guarantee any business outcome based on the contents of this article.
