The town was named after Colonel Davis Floyd. James Moore built a gristmill here in 1815. The word "knobs" comes from the local terrain. As one approaches Floyds Knobs from the southeast, The Knobstone or Siltstone Escarpment rises 400–850 feet above the Ohio River floodplain along the northwestern edge of New Albany, Indiana. The eroded hills along the edge of this plateau, called knobs, are the eastern edge of the Norman Upland geologic area of Indiana. Floyds Knobs is home to PGA golfer Fuzzy Zoeller.
Historically, the commercial center of the community was at the intersection of Scottsville Road and Paoli Pike, (Old U.S. Highway 150) along the primary route from New Albany to Paoli, Indiana. However, exit 119 on Interstate 64 (US 150) has substantial commercial and residential development west of the historic center.