Retail floor planning (also referred to as floorplanning or inventory financing) is a type of short term loan used by retailers to purchase high-cost inventory such as automobiles. These loans are often secured by the inventory purchased as collateral.
Floor planning is commonly used in new and used car dealerships. Contrary to common perceptions, most car dealers do not pay cash for the vehicles on their lot. Even smaller dealerships can have an inventory of vehicles representing millions of dollars of capital investment.
Most car dealerships floor plan their vehicles, and factor the cost of financing inventory into their sale price. This also creates incentive for the dealers to turn around vehicles as quickly as possible. Floor planning costs can run into hundreds of thousands of dollars a month for a big multi-location dealer with large inventories.
In the case of new vehicles, they are generally floor planned by the manufacturer, such as General Motors Acceptance Corp, or GMAC. With used car dealers, specialty finance companies cater to their industry, such as Automotive Finance Corporation or NextGear Capital.
Rather than offering loans for each individual vehicle purchase, most floor planning companies supply dealers with a revolving line of credit that they can use to acquire inventory, such as through automobile auctions.
Floor planning (flooring) vehicles is a great way to acquire inventory, but can have negative consequences if payments (curtailments) are not made on time. Curtailment schedules vary by floor plan providers, but generally range from 5%-20% of the original loan proceeds on each vehicle every 30-60 days. If curtailments are not made, floor plan companies can attach a dealers bond and effectively put the dealer out of business. With effective management, floor planning is a great way to kickstart a new dealership.
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