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Floor plan financing helps Buy Here Pay Here (BHPH) dealers purchase vehicles using a revolving credit line, keeping cash available for other expenses. Each vehicle serves as collateral, and dealers repay the lender as cars are sold, freeing up credit for future purchases. Key benefits include better cash flow, more inventory options, and simplified purchasing. To maximize its potential, dealers must manage costs, track performance metrics, and maintain strong lender relationships.
Floor plan financing is a tool for scaling inventory and building stronger loan portfolios when used strategically.
This section breaks down how floor plan financing operates and its key elements.
Floor plan financing is a revolving credit line that helps dealers purchase and manage automotive inventory. Knowing how it works can help dealers use it more effectively.
With floor plan financing, each vehicle serves as collateral for its purchase. Here’s how the process works:
Lenders assess several factors when approving credit and setting terms for floor plan financing. These typically include:
Floor plan financing comes with several costs that dealers need to account for:
| Cost Component | Typical Rate | Example |
|---|---|---|
| Floor Planning Fee | $85 per vehicle | Covers the first 60 days |
| Daily Interest | $0.27 per $1,000 | $2.70 daily on a $10,000 vehicle |
| Title Processing Fee | $18 per vehicle | One-time fee for title handling |
Interest is calculated daily on the vehicle’s outstanding balance. For example, a $10,000 vehicle would incur about $2.70 in daily interest, in addition to the initial $85 floor planning fee.
To keep costs under control, dealers can:
Understanding and managing these costs is essential for maintaining profitability while using floor plan financing.
Floor plan financing allows BHPH dealers to broaden their range of vehicles without draining their cash reserves. By using credit lines strategically, dealers can stock a variety of vehicles to attract different customer groups.
A well-structured floor plan ensures you maintain the right inventory levels, offer vehicles at diverse price points, adapt quickly to market trends, and keep your selection appealing.
Using a Dealer Management System (DMS) can make this process smoother. It helps track floored vehicles, monitor turnover rates, and make decisions based on data. These tools and strategies are key to keeping your cash flow under control.
Balancing cash flow while growing your inventory takes careful planning. The trick is to make the most of your inventory options without maxing out your credit.
"Just because you are approved for a $250,000 line of credit doesn't mean you have to go out and spend it all at the next auction. Buy in proportion to your sales figures." - NextGear Capital
To keep cash flow steady, use only a portion of your credit line, match payments to your sales cycles, and set aside funds for daily operations.
Keeping inventory growth manageable means staying on top of turnover rates, maintaining clear communication with your provider, and closely watching financial metrics like NSFs and turn times.
"Cash flow is the number one key to a successful business." - NextGear Capital
Keep inventory levels in line with your sales goals and turnover rates to ensure smooth operations.
Here’s a simple formula to calculate your ideal inventory level:
Monthly Desired Sales ÷ Total Yearly Lot Turn × 12 = Optimal Inventory
For example, if you plan to sell 60 units monthly and your inventory turnover is 40 days (or 9 times a year), your optimal inventory level would be 80 units.
From there, make sure to track key metrics to maintain a healthy loan portfolio.
Tracking performance metrics helps you measure how effectively sales convert into loans.
| Metric | Description | Target |
|---|---|---|
| Turn Time | Days inventory stays on the lot | 45 days (industry standard) |
| Holding Cost Per Unit | Monthly cost per unit in inventory | Calculate daily for accuracy |
| Monthly Sales Volume | (Units in Stock × Yearly Turns) ÷ 12 | Match inventory capacity |
For instance, calculating holding costs per unit by tracking monthly expenses against stock levels can guide your pricing and sales strategies.
Using data effectively can sharpen your inventory decisions and support earlier strategies for managing cash flow and risk.
"With a floor plan, the initial investment needed to buy a particular unit is a fraction of the vehicle's actual purchase price. As soon as that vehicle sells to a consumer, floor planning dealers have the ability to immediately realize profits, pay back the initial value of the loan plus interest and fees, and had the flexibility to keep their funds working for their dealership." - NextGear Capital
Tips for managing your portfolio with data:
Clear communication is key to building trust with your floor plan provider and securing better terms. A few metrics can significantly influence your negotiating power:
| Performance Metric | Target Range | Impact on Terms |
|---|---|---|
| Inventory Turn Time | 45–60 days | Lower interest rates |
| Payment History | Zero NSFs | Increased credit limits |
| Audit Compliance | 100% clean audits | Reduced fees |
| Vehicle Aging | Under 71 days | Flexible payment terms |
If you expect a payment delay, contact your provider before the due date. Taking this step shows responsibility, builds confidence, and may lead to more flexible terms. Strong negotiations can improve your overall inventory management.
A dealership that implemented daily inventory tracking saw a 40% reduction in days supply, reduced floor plan charges by $300,000, and added $100 in per-unit gross profit. Here’s how you can optimize your system:
"The most important thing is it can be tamed, harnessed and even become one of your revenue producing allies. Its limitation is poor information." - Scott Dreisbach, Contributing Author, Auto Dealer Today
Effective cash flow management is essential. Align your inventory strategy with your dealership’s capacity by calculating:
Set sales targets that align with your floor plan payment deadlines. This approach helps move older inventory while maintaining financial stability.
"Once a dealer is cleared to use an automotive floor plan, they instantly have access to more capital to aid in purchasing inventory. However, along with that instant access to more capital is a new set of management responsibilities."
"Floor planning can help provide a dealership with discipline... Dealers have a given amount of time available until they have to pay a vehicle off. Use that deadline to the dealership's favor."
Floor plan management isn’t just about borrowing capital - it’s about using it wisely to create a thriving and profitable business. Keep a close eye on your metrics and adjust your strategy based on real-world performance.
Floor plan financing plays a crucial role in helping BHPH dealers grow their businesses by increasing inventory in a strategic way. By applying the financing models, management techniques, and portfolio strategies detailed in this guide, dealers can use credit lines to improve and expand their operations effectively.
Floor plan financing provides more than just a way to expand inventory. Here’s how it impacts your business:
| Benefit | Impact |
|---|---|
| Capital Efficiency | Keeps cash available for daily operations and investments |
| Portfolio Growth | Helps scale receivables quickly |
| Inventory Selection | Broadens the range of vehicles you can offer |
| Business Stability | Ensures steady operational cash flow |
| Market Flexibility | Enables quick adjustments to market changes |
By focusing on these advantages, dealers can turn opportunities into tangible growth.
To make the most of floor plan financing, think of it as a strategic resource rather than just a funding option. Here are some practical steps to guide you:
"What I love most about PrimaLend is their willingness to help. I know I can pick up the phone and talk to pretty much anyone there and they'll make time for me." - Dealership Owner/Operator, Selma, AL
More than a decade of Ivan's career has been dedicated to Finance, Banking and Digital Solutions. From these three areas, the idea of a fintech solution called Debepxert was born. He started his career in Big Four consulting and continued in the industry, working as a CFO for publicly traded and digital companies. Ivan came into the debt industry in 2019, when company Debexpert started its first operations. Over the past few years the company, following his lead, has become a technological leader in the US, opened its offices in 10 countries and achieved a record level of sales - 700 debt portfolios per year.
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