Keeping your dealership afloat can often be a challenge, especially if you are just starting out or trying to buoy yourself against the economic effects of the COVID pandemic — not to mention if you are trying to do both at once. Luckily for you, there is a special kind of financing option that gives your dealership the flexibility it needs to keep the doors open and vehicles on the lot.
Floor plan financing goes by many names: retail floor planning, floorplanning, and inventory financing to name a few. Whatever you call it, this kind of financing is a short-term loan used by dealerships to buy high-cost inventory like cars, RVs, boats, and other vehicles or heavy equipment. Even large appliances and other consumer retail stores make use of floor plan financing. Unlike other loans, floor plan financing is secured by using the same purchased inventory as collateral — meaning you are buying your own collateral with the very same loan.
Believe it or not, most used and new car dealerships use some form of floor plan financing, whether by the vehicle manufacturer or a specialty finance company like Web Finance Direct. Since even the smallest dealerships can have an inventory worth millions of dollars, very few dealerships own their vehicles outright. While this might seem a bit strange, floor plan financing helps dealerships in two main ways:
- It lets dealerships fill their lots, giving their customers more options which, in turn, provides more opportunities to make a sale.
- It incentivizes dealerships to make these sales as quick and efficient as possible to minimize interest payments on floor inventory.
Moreover, instead of taking out loans for individual vehicles, most dealerships use a revolving line of credit with their floorplanning company so they can replenish inventory easier. It also allows them flexibility to choose where and how they replenish their inventory, whether new vehicles direct from a manufacturer or making use of used car sales at an auction or private sellers.
Floor plan financing does not come without its challenges, however. Because the purchased inventory represents the collateral that backs the loan, if the dealership fails to sell enough inventory regularly, they run the risk of accruing late fees, mounting interest, and repossession. With that in mind, it is important to work with a lender you can trust and ensure you are buying the right amount of inventory given current market conditions as well as having a trained sales force to keep vehicles moving off the lot.
Despite this potential drawback, dealerships prefer floor plan financing as it gives them a bit more control over how the loan is used with the flexibility of being able to reinvest right away in new inventory. This, in turn, allows savvy dealerships to scale effectively and leverage their investment compared to relying on a traditional loan with a fixed amount of capital.
If you are interested in learning more about floor plan financing and how to make it work for you, reach out to Floor Plan Xpress today. We would love to talk to you and help you find the solution you are looking for. With the warm summer months ahead and the pandemic slowly coming to a close, there is no better time to breathe new life into your business.