What is floorplan finance?

Floor plan finance allows dealers to finance the purchase of inventory for their showroom without having to tie up working capital. Typically used by dealers of motor vehicles (including automotive, trucks and trailers), recreational vehicles, boats, agricultural and industrial machinery, floor plan financing enables dealers to keep larger volumes of stock on hand ready for customers to purchase.

How does floor plan finance differ from other types of finance?

Unlike other forms of finance, dealer repayments are tied to the sales cycle; put simply the dealer repays the principle balance of the stock once it is sold. Other types of finance will generally have fixed repayment terms, irrespective of sales.

How does floor plan finance work?

When a dealer takes out floor plan finance, the lender pays the manufacturer or supplier for the inventory that the dealer has purchased. The inventory is then displayed by the dealer and is used to generate sales. However, the inventory acts as collateral for the finance, with the lender retaining title over the goods.

As the dealer sells each item, they repay the lender for that specific item, along with any interest and fees that have been incurred. Once all inventory has been sold, the dealer can is able to decide if they would like to finance additional stock for sale. Interest is paid on the borrowed amount, with the rate and fees varying based on the terms of the floor plan finance and the credit score of the dealer.

What are the benefits of floor plan finance?

There are many benefits when it comes to floor plan finance, including:

Sales Growth

Floor plan finance allows dealers to stock a wider variety of stock, ensure their showrooms are well stocked and stock levels remain consistent, driving sales and creating a positive customer experience.

Increased cash flow

Improve your cash flow and free up capital to utilise for other expenses and growth opportunities.

Optimise inventory

Order more stock quickly based on sales and customer demand, without the stress of trying to find extra cash.

Things to consider when taking out floor plan finance

There are a few key considerations when looking to take out floor plan financing.

Carrying too much stock

It is important to be mindful of purchasing too much inventory. Whilst you can access a line of credit, you also need to be able to meet obligations of the facility, like curtailments and interest. Too much stock, particularly if you experience a downturn in sales, can make it harder to meet these repayments.

Fees and Charges

Fees pertaining to the facility can impact your profit margins, especially if stock turnover is slower than expected. Whilst you might not have to make repayments till items are sold, you will continue to incur fees when stock is not moving and becoming aged.

Maintain open lines of communication

It is recommended that you keep your lender up to date and informed of any changes that may affect your inventory and sales. For example, if you know that you are unable to make a repayment on time, it is important to let them know as soon as possible.

Cash flow management

Floor plan finance frees up cash reserves for other expenses and business endeavours, rather than having liquidity tied to operating stock, take advantage of growth opportunities

Stock Audits

Typically, your lender will carry out a stock audit every month. To ensure a smooth process and create a positive relationship with your lender, it is a good idea to ensure your inventory can easily be audited when required.

Effective account management

As with any finance, it is vital to understand all terms, conditions, and fees before entering into any financial agreement. You are responsible for being aware of when payments are due and ensuring all payments are made on time.

Stock turnover

How quickly your stock sells will impact the amount of interest payable on your floor plan finance. For example, in the motor vehicles industry, ideally, stock needs to be sold within 45 days, as profit margins start to decline anywhere beyond this.

Be mindful that if stock isn’t selling, sometimes it can be better to reduce the price to make a sale, rather than holding onto items, which will increase the interest you owe. Selling stock will also allow you to buy new inventory that hopefully sells faster.

Looking to secure floor plan financing for your business?

When considering floor plan finance, looking for lenders with a strong reputation with other businesses within your industry is important. Before entering into any financial agreement, look into all associated fees and charges and read the fine print.

A beneficial tool for dealerships, floor plan finance can allow you to diversify your inventory, drive sales and continue building your business, whilst maintaining liquidity. If you are looking to secure floor plan financing for your business, we offer various options tailored to suit your business needs. For more information or to take out floor plan financing today, contact one of our team members to discuss your requirements in further detail.