What Is Floor Plan Financing?

by Bill Herrfeldt - Updated October 12, 2018

Go to any large auto dealer and there are hundreds of cars on the lot. You may wonder how much the dealer had to spend to provide you with almost limitless choices. What you don't realize is that, like most new car dealers, a floor plan was used to finance the cars. Simply, it is a way for an auto dealer to use a lender's funds to finance the cars, and until each of them is sold, the lender holds title to the cars. The dealer then receives payment, hopefully including a profit, and remits the balance to the lender who, in turn, releases the title to the car to the new purchaser. Floor plan financing is also done for large appliances, mobile homes and boats, among other items, and these products are usually sold to consumers with a financing contract.

Consumers Get a Greater Product Selection

Without floor planning, a dealer would not be able to have a wide selection of merchandise in his showroom or on his lot, and most of the added features that you can buy would most likely be in catalogs or brochures rather than there for you to see. Also, most likely you would have to ask the dealer to order the merchandise from the manufacturer, and it might take a month or two before your order can be delivered to you

Floor Plan Inventory Makes It Easier for Dealers to Sell

Most dealers will agree that it is far easier to sell a product when you have it in stock as opposed to selling it from a catalog or an ad from the manufacturer. So by having a large inventory of products available through floor planning, dealers most likely will enjoy increased sales and profits. If you work as a dealer, you know that your time is at a premium. You need simple solutions to run your business, and floor plan financing could streamline your inventory acquisition and reduce some of your administrative costs.

Video of the Day

Brought to you by Techwalla
Brought to you by Techwalla

Reduces the Manufacturer's Costs

When a piece of merchandise from a manufacturer is received by the dealer who has a floor planning arrangement with a lender, the lender notes the item and immediately sends the manufacturer a check for it. Therefore, the manufacturer does not have to worry about when the product is sold to the end user, so his costs are also reduced.

Understanding Floor Plan Loans

Unlike most collateral on loans that is mostly static, the retailer is in more control of the collateral under a floor planning arrangement, and that makes it harder for the lender to control because it will fluctuate from day-to-day. For that reason, a lender must physically check the inventory of a client often to make sure that his loan remains adequately covered. Also, if inventory financed by a floor plan loan is moving slower than expected, the lender may ask for payment from the dealer for interest and possible depreciation of its collateral. And in a soft economy, that can pose a serious problem both for the lender and the retailer.

Who Offers Floor Plan Financing?

Many major banks offer the floor plan arrangement to its larger retail customers. Also, the major automobile manufacturers in the United States created GMAC, Ford Motor Credit Co. and Chrysler Credit to provide both floor planning to its dealers as well as to make car loans to buyers. Over the years, it order to increase sales, these companies offered floor planning to its dealers at a lower interest rate to encourage them to take more cars into inventory.

About the Author

Bill Herrfeldt specializes in finance, sports and the needs of retiring people, and has been published in the national edition of "Erickson Tribune," the "Washington Post" and the "Arizona Republic." He graduated from the University of Louisville.

Cite this Article A tool to create a citation to reference this article Cite this Article