For an independent dealer who’s just getting started with floorplan financing, you might hear terms like “curtailment” and “advance rate” and your head starts to spin. But simply understanding the vocabulary can go a long way towards making things as easy as possible as you transition from paying in cash to flooring inventory.
To help you to be able to talk about your new floorplan (or “floor plan,” as you may see some call it) financing solution, here’s a short list of common terms and general definitions you should know.
When a lender lends money, the borrower is borrowing against collateral—basically, something of value they stake as proof that the loan will be repaid. But in many cases, a lender won’t loan the full value of that collateral. For example, when the collateral is something that can change in value, like land, if the lender loans the full original value of the property but that value drops, they risk not being able to recover the money they loaned.
Because of that, many lenders like auto finance companies will only lend a certain percentage of the value of the collateral to limit risk and guarantee that money loaned doesn’t disappear. This advance rate can also benefit the dealer, as it can allow either a better interest rate or a larger loan amount than they might otherwise get.
A buydown is a principal payment made by a borrower to meet lender guidelines on a specific unit. For example, if a floored vehicle has a lien on it and the money is being paid directly to the lienholder, that total amount may exceed what’s allowable on the dealer’s floorplan. Because of this, the dealer would be required to pay down the principal to get the vehicle within the allowable value range. This applies to non-auction purchases and auction purchases alike—if a dealer pays $110,000 for a vehicle on a $100k floorplan, one option they would have to be able to floor that vehicle would be a $10k buydown.
A curtailment is a payment a dealer makes to the floorplan lender that reduces the outstanding balance on the loan, which is required by the lender in certain circumstances.
For example, at AFC a curtailment payment could be contracted for the end of a loan term in the case that a purchased vehicle hasn’t sold yet. After 60 days, a dealer might pay a predetermined percentage of the remaining principal to get another 60 day term.
Not all floorplan lenders allow curtailment payments, and the ones that do may have restrictions on how and when they can be made. There may also be other unique conditions relating to curtailments—like AFC’s Principal Pass, which allows dealers to curtail without having to make a principal paydown.
When a dealer takes out a loan, the auto finance company will want to ensure that their records match reality. A floorplan audit, like any other audit, is a process by which the floorplan lender verifies the inventory and any other information provided by a dealer to make sure that all compliance requirements are met. In short, a floorplan audit ensures that all floored vehicles are where they’re supposed to be.
When a vehicle is placed on a dealer floorplan, a one-time contracted fee is assessed. Along with interest, this is essentially the “cost” of the floorplan loan. But even if a vehicle is curtailed once or multiple times, the floorplan fee is only assessed once.
Simply understanding the vocabulary makes things easier as a dealer transitions from paying in cash to flooring inventory.
Floorplan financing is a line of credit that auto dealers can use to purchase new inventory. Independent dealerships can borrow money from an auto finance company, with their existing inventory serving as collateral, and use that money to purchase vehicles from a variety of inventory sources, including auctions, online marketplaces, trade-ins, and more.
One of the great advantages of a floorplan is that it’s specifically designed to be used for auto inventory purchases, as opposed to a generic business loan.
Floorplan providers are financial institutions that extend floorplan lines of credit to dealerships. Auto finance companies that provide floorplans cater to independent dealers, where a bank or other potential loan source may not be as intimately involved in the auto industry.
Many floorplan providers work closely with the dealers they loan money to, providing additional services that help independent dealerships grow. AFC, for example, has branch locations across the United States, with on-site professionals who know not only the industry, but the unique factors that affect each market.
When money is loaned, it is paid back with interest at a predetermined rate that’s agreed to in each loan contract. Each financier sets their own interest rate, customized to the individual borrower and borrowing situation. An auto dealer financer might have a range of floorplan options, each with unique interest rates.
When a car is financed, a lien is created—the lender holds the car’s title until it’s paid off. That lender is then known as a lienholder; typically a lienholder will be a financial institution of some kind.
Paying liens requires a lot of back and forth, and can tie up time and cash for independent dealers. That’s why some auto finance companies, like AFC, offer lien pay services that verify payoff, assist in remitting funds, and follow up on titles on the behalf of dealers.
Many dealers are creative in finding new inventory outside of your typical auction. Purchasing a customer trade-in, directly from another dealer, or off the street are alternative purchasing sources. While dealers can’t use funds from a floorplan line of credit on non-inventory items like a new sign for the lot or furniture in the waiting room, they aren’t restricted from purchasing inventory from a single source. Each floorplan provider (and dealer contract) have their own terms regarding eligible inventory, but it’s fair to say that if it’s the type of inventory you can find at an auction, you can most likely use your floorplan to fund it.
Technological advances have made it easier than ever to buy and sell online, and the auto industry is no exception. Online marketplaces are digital-only auctions, where dealers can transact business remotely via their desktop, mobile device, or tablet. Some marketplaces have sales running 24/7 and many offer transportation services so you can truly buy from anywhere at any time.
A floorplan loan’s terms are the conditions of the specific loan agreed to in a contract between borrower and lender. These include things like the length of time the borrower has to pay off the loan, the types and cadence of payment required, and the interest rate. Terms that work for one dealer may not be ideal for another, but most auto finance companies have a number of floorplan options available to suit multiple needs.
A payoff is a lump sum paid to the financier of a loan for a piece of collateral to repay the full amount of the loan, inclusive of all fees and taxes. This is not necessarily as simple as just paying the current balance—your payoff amount also includes any interest owed through the date of the payoff, as well as any other fees that have been incurred and not yet paid.
The traditional auto auction most dealers are familiar with has running through lanes and dealers bidding on them live and in-person at the physical auction location. While there are plenty of other inventory sources gaining traction, traditional physical auctions remain a tried and true option for independent dealers to purchase new inventory.
Repossession is the process by which an auto financing company reclaims floored inventory when a dealer fails to meet the payment terms of their contract. Since the auto finance company that provides financing technically owns the inventory on the lot until the loan is repaid, defaulting on the loan means that they have legal right to the property.
The more a dealer knows, the better equipped they are to succeed in floorplanning.
Sold and unpaid
When a dealer sells a vehicle that they financed using their floorplan, they have to pay off that loan. But that’s not always a same-day occurrence—there can be a delay. When a unit is sold and unpaid, an auditor will need to verify that the payment is in process or investigate other causes for the delayed payment. If the auditor finds there is not a reasonable cause, the vehicle may be considered to be sold out of trust.
Sold out of trust
When a financed vehicle is sold by the dealer but they fail to make the payoff for the unit back to the financer, that vehicle is considered to have been sold out of trust. This is a fairly serious offense—if intentional fraud is provable, selling out of trust is a criminal matter, but if it’s not intentional, the dealer is still vulnerable to a civil suit and to losing their dealer license.
A vehicle’s title is proof of ownership. It’s a legal document issued by the state that includes information about the vehicle including vehicle year, make, VIN, seller, purchaser, purchase price, and purchase date. When a vehicle is purchased by a dealer and added to their floorplan line of credit, the title passes not to the dealer, but to the floorplan provider. Once the loan is paid off by the dealer, the title passes to the dealer—and then, typically, to the customer who purchased the vehicle.
What dealers need to know about floorplan financing
There’s a lot for a dealer to know when they are just starting out flooring inventory purchases. The more you know, the better equipped you are to succeed. But the learning process doesn’t have to be difficult or painful. With an auto finance company that works in collaboration with your dealership, the transition from using cash to floorplan financing can be incredibly smooth.
Disclaimer: Dealers should consider all factors prior to agreeing to a floorplan and consult with their own advisers to make an independent business decision by reviewing the risks and advantages prior to signing any agreement. These descriptions of floor plan terms are general and actual terms and conditions of a floorplan are subject to the final written agreement between a dealer and its lender. AFC does not guarantee any business outcome based on the contents of this article.