Best Practices of Using a Floorplan

For independent automotive dealerships, effectively managing inventory and cash flow is important for success. While cash is traditionally used when stocking up on inventory, floorplan financing offers a powerful alternative that may provide significant benefits and help transform any dealership.

What is a Floorplan?
Think of it as a revolving line of credit specifically designed to help independent dealers purchase inventory without tying up your own cash. Floorplan financing allows you to acquire vehicles from a wide variety of sources—not just auctions. The loan is then repaid when the vehicle purchased using the floorplan is sold or when the loan comes due, similar to a revolving line of credit, with the dealer retaining any net profit from the sale. This financial tool allows dealers to acquire new inventory without waiting for previous sales to generate cash.

Best Practices
When used strategically, a floorplan can be a valuable tool for your dealership. Here are some key best practices:

Choose The Right Terms

• Match Financing to Your Needs - A good floorplan provider offers a variety of solutions, from short-term plans for high-volume wholesale to longer terms for vehicles needing reconditioning. Choosing a credit line that matches your specific business model allows you to strategically tailor your financing to your inventory and sales strategy, which can provide the flexibility needed for success.
• Know Your Fees and Interest Rates - Carefully consider all costs associated with your floorplan, including fees and interest rates because these costs can significantly impact your profitability if not properly accounted for. Always factor these expenses into your vehicle pricing and profit calculations to ensure they do not unexpectedly reduce your margins.

Strategically Grow Your Inventory

• Increase Your Buying Power - A floorplan allows you to increase your buying power at auctions and acquire more vehicles when the prices are favorable. This strategic use of credit can help you grow your inventory faster, potentially enabling more sales and additional profit that can help offset financing costs.
• Practice Credit Discipline - While a floorplan helps you grow, it is crucial not to overextend your credit line. Rapidly acquiring inventory without a clear plan for sales can put a strain on your cash flow due to increased carrying costs.

Cash Flow Management and Inventory Movement

• Free Up Cash Flow - By using a floorplan for vehicle purchases, you can use your funds for other business needs, such as facility upgrades, marketing initiatives, and payroll. This financial flexibility strengthens all areas of your business as your inventory grows.
• Monitor Your Turn Times - The longer a vehicle stays on your lot, the more it costs in interest and fees. For this reason, neglecting inventory turnover is a major mistake. A high turnover rate is essential for a successful floorplan because it can help ensure prompt loan repayment and frees up your credit line to acquire new inventory. A quick sales cycle is important to help maximize your returns and minimize carrying costs.

Prepare for Success

Floorplans are not a magic solution, but when approached with a clear strategy and responsible management, they are an important tool for independent dealerships. The success of any financing relationship begins with careful preparation, and dealers should always consult their own advisors to make independent business decisions regarding financing. By working closely with your floorplan provider, you can better prepare your dealership for growth!