Floor plan financing is a short-term loan collateralized by the inventory held at a dealership and is directly associated with specific vehicles on the showroom floor or lot of the dealership. The loan can be with the financing arm of the original manufacturer, a traditional banking institution, or a specialty lender.
Once the inventory is sold to the end customer, the loan is repaid. The longer that the inventory remains on the showroom floor or dealer lot, the higher the cost associated with any floor plan financing. For this reason, inventory turnover is important in keeping costs associated with floor plan financing to a reasonable level.
Floor plan financing allows a dealership to have greater flexibility over cash needs. Due to the flexibility that floor plan financing offers, most dealerships will finance almost all new inventory as it’s generally expected that new vehicles will turnover quickly. We find that the level of financing associated with used inventory can vary greatly between dealerships.
Floor plan financing for used inventory can be beneficial for dealerships that have strong inventory controls and turnover in the used department.