Floor plan financing is a useful tool that allows car, RV, boat, and heavy equipment dealerships to remain competitive while keeping their sales lots full. Although this kind of financing is a boon for these kinds of businesses, it is not without its own drawbacks. Let’s take a look at some of the pros and cons of floor plan financing.
Benefits of Floor Plan Financing
Gives Dealerships Financial Flexibility
One of the major advantages of floor plan financing is that it gives dealerships a lot more flexibility with how they spend compared to traditional fixed loans. Where a fixed loan has a set amount that needs to be paid back before that loan transaction is complete, floor plan financing lets dealerships draw from a revolving line of credit.
After a dealer sells vehicles and equipment purchased with floor plan financing, they can reinvest the money back into purchases directly from manufacturers or in private auctions and used car sales. Moreover, where traditional loans are generally only offered by business banks, dealerships can establish floor plan financing plans with specific manufacturers, indirect lending companies, and other financial institutions.
An interesting feature of floor plan financing is that the vehicles and equipment purchased are used as collateral to back the financing. This allows new dealerships to fill their lots a bit easier when they might not have the established credit for a traditional loan for the same amount.
Provides Dealerships with More Control
Combined with the point above, these options give dealerships more control over how they conduct and finance their business. The revolving line of credit allows them to keep humming along, purchasing what they need, how and when they need it.
By also having a wide variety of institutions to choose from, dealerships can shop for the best financing plans available whether through banks or the manufacturers whose equipment and vehicles they sell. With businesses like manufacturers and indirect lending companies specializing in floor plan financing, they can offer better insight than other institutions whose primary focus is banking. This specialization will come in handy when dealerships are trying to find the right financing plan to keep their business afloat.
Helps Boost Potential Sales
An indirect benefit floor plan financing has is the potential to boost sales performance. For instance, a lot with a sparse selection of vehicles is not nearly as attractive as one that makes use of every bit of space. Indeed, barren lots and floors are indicators of poor business health which may turn away customers.
Aside from the curb appeal, the larger inventory backed by floor plan financing gives customers more choices, directly translating into more opportunities to make a sale. With a sales team skilled in identifying customer needs and helping them find exactly what they are looking for, all that remains is the paperwork.
The structure of floor plan financing also incentivizes sales to be made quickly and efficiently. The sooner floored vehicles are sold, the less interest your business pays and the extra money can be used to reinvest in purchasing more inventory or other costs your business has.
Potential Drawbacks of Floor Plan Financing
Curtailments Can Hinder Growth
In that same vein, curtailments can become an issue if sales are not made fast enough. The very system meant to boost sales efficiency can easily become a burden with businesses that do not manage their sales campaigns effectively.
Usually, curtailment schedules follow a 30/60/90/120 day formula with fees of 5-20% based on the original loan proceeds on each vehicle. Dealerships that fail to sell vehicles backed with floor plan financing can face additional penalties, increased interest rates, as well as repossession. To mitigate this, it is a common practice for dealerships to start auctioning off their vehicles that have been floored for at least 60 days to avoid further penalties and recover some of the loss.
Trouble Determining Scale
Like any financing tool, not understanding the scale of your monetary needs can cause other issues. If your dealership tries to take on too much or too little, you run the risk of not being able to afford enough to fill the lot or buying more inventory than you can reasonably sell at your current rate, opening you up to curtailment issues.
This issue, however, is easily avoided by working with a knowledgeable floor plan financing company you can trust. By knowing how to assess your resources, business experience, and risk appetite, these specialized companies can help you find the lending options that are right for you and your business.
While this list is not exhaustive, feel free to contact the experts at Floor Plan Express for more information on the ins and outs of floor plan financing. We would love to help you and your business find exactly what you are looking for.