Floor plan financing is a revolving line of credit that allows dealerships to purchase inventory without tying up their cash flow. It is a common practice in the automotive and RV industries, but can also be utilized by other businesses that rely on inventory to generate revenue. In this article, we will walk you through a detailed example of how floor plan financing works.
Let’s consider a fictional car dealership, ABC Motors, that is looking to utilize floor plan financing to purchase new inventory. ABC Motors works with a lender who provides a floor plan line of credit up to $500,000. This line of credit allows ABC Motors to purchase new vehicles from manufacturers and hold them on its lot until they are sold to customers.
1. Initial Purchase: ABC Motors decides to purchase ten new cars from a manufacturer at an average cost of $20,000 per vehicle. With a total cost of $200,000, ABC Motors uses its floor plan line of credit to make the initial purchase. The lender pays the manufacturer directly on behalf of ABC Motors.
2. Holding Period: The new cars arrive at ABC Motors’ lot and are ready for sale. The dealership now has 90 days to sell the vehicles before the lender requires repayment. During this holding period, ABC Motors is responsible for maintaining the vehicles, advertising them for sale, and finding buyers.
3. Sales Process: Over the next 60 days, ABC Motors successfully sells six out of the ten new cars at an average price of $25,000 per vehicle. The total revenue from these sales amounts to $150,000. The dealership uses this revenue to pay off the lender for the sold vehicles.
4. Repayment: After selling the six cars, ABC Motors still has four vehicles remaining in its inventory. The dealership must now repay the lender for the unsold cars within the 90-day holding period. With each vehicle costing $20,000, ABC Motors owes a total of $80,000 to the lender.
5. Renewal or Repayment: ABC Motors has two options at this point. They can choose to renew their floor plan line of credit to continue purchasing new inventory, or they can repay the lender in full for the remaining unsold cars. If ABC Motors chooses to renew, they can use the proceeds from the sale of the four remaining cars to purchase new inventory and continue the cycle.
In this example, floor plan financing has allowed ABC Motors to efficiently manage their inventory and cash flow. By leveraging a line of credit to purchase vehicles and sell them within a specified time frame, the dealership is able to maximize their revenue potential without taking on the financial burden of purchasing inventory outright.
It’s important to note that floor plan financing example is just one of many scenarios that can occur in a dealership’s operations. Factors such as market conditions, seasonal trends, and customer demand can all impact the success of a floor plan financing arrangement. Dealerships must carefully monitor their inventory turnover rates, sales performance, and repayment schedules to ensure that they are making the most of their floor plan line of credit.
In conclusion, floor plan financing is a valuable tool for dealerships looking to optimize their inventory management and cash flow. By understanding how floor plan financing works and implementing best practices, dealers can streamline their operations and increase profitability. Whether you are in the automotive, RV, or another industry that relies on inventory, floor plan financing can help you grow your business and achieve success.