Many things can impact a used car dealer’s profitability, and many of those are outside of their control. But one of the things a dealer can control, at least in part, is time. Floorplan term length—that is, how long a dealer has between flooring a vehicle and when payment comes due—can be one of the easiest ways to manage carrying costs (also called holding costs). When negotiating the contract with an auto finance company, the length of the floorplan’s term is an important part of the decision-making process.
While it’s clear that a dealer will always prefer to pay a unit off rather than pay curtailments, there are two schools of thought that dictate a term-length preference: turning more inventory more often makes you more money; or there’s a person for every car and it’s worth the wait.
Term lengths generally fall into two buckets—short-term and long-term—and each comes with its own benefits and risks. Let’s dive deeper into the differences between the two.
Time is money—the longer a vehicle is on a lot, the more risk a dealer carries and the larger the daily investment grows.
Long-term dealer floorplans
When selecting a floorplan (you may also have seen “floor plan”—both are the same thing) payment term that is longer—90, 120 days, or even more—here are three things dealers should be mindful of.
- Time to line: number of days from vehicle acquisition to frontline-ready appearance on the lot.
- Days to sale: number of days from first appearance on the lot to the time a consumer purchases the vehicle.
- Carrying costs: daily dollar figure that represents a portion of the overhead applied to each vehicle until it sells.
Time is money, and the longer a vehicle sits on a dealer’s lot unsold, the more risk they carry and the larger the daily investment grows. But depending on the dealer’s business model, the unit in question, and their local market, the profit may be worth the wait.
Long-term floorplan cost
There are three key costs associated with a long-term floorplan. The first is the floorplan fee, which is a one-time cost to put a unit on the credit line. The fee itself depends on the specific contracted terms between the dealer and auto finance company. For a longer-term loan, these fees tend to be slightly higher.
The second is interest, which also depends on the contracted terms agreed upon. The third is curtailment cost—if the vehicle hasn’t been sold by the end of a term, that term may be able to be extended for a fee and payment of a predetermined percentage of the loan’s principal, but some floorplan providers offer limited postponements on principal paydown.
Short-term dealer floorplans
Short-term floorplans are those with terms under 90 days, such as 30, 45, or 60-day terms. The majority of AFC dealers select a term around 60 days. A shorter term on a dealer floorplan offers a number of advantages. But its greatest benefit is that it helps a dealer manage carrying costs on each unit, and it helps a dealer stay disciplined regarding how long inventory stays on the lot. The longer a unit’s on the lot, the more costs it can accrue. If it is still unsold when you reach curtailment, it forces you to consider how you want to move forward—keep it on the lot and wait for the sale, or liquidate it by selling it at auction or directly to another dealer.
A short-term floorplan’s greatest benefit is that it helps a dealer manage carrying costs on each unit.
Short-term floorplan cost
The main cost difference between a longer and a shorter term floorplan comes in curtailment fees and interest. When the floorplan fee is assessed, it’s often a lower one-time cost than it is for a longer-term floorplan. But if the vehicle isn’t sold by the end of the term and you have to pay a curtailment fee and principal paydown to extend it, that can add up. Interest rates can often be lower on a short term too, and for some dealer floorplans, interest isn’t assessed at all or it’s folded into flat term fees.
Some auto finance companies even offer floorplans that operate on a daily fee structure. For example, AFC offers the Daily Tab floorplan, which has an inclusive daily fee determined by the floored value of the vehicle. Dealers using Daily Tab only pay for the days that a vehicle is on the floorplan, keeping costs lower in the short term. Especially for less expensive inventory and vehicles a dealer expects to sell quickly, this kind of floorplan can be incredibly useful.
Weighing the benefits and the risks
|Can be lower overhead cost
|Provides extra time for vehicle transportation or reconditioning
|Encourages disciplined inventory management
|Supports specialty inventory sales cycles
|Helps dealer stay “above water” on investment
|More time to make a sale before payment is due
|Payment due before sale is made
|Requires ongoing vehicle upkeep
|No control over market and demand
|Accrued interest and fees add up
|Doesn’t allow extra time for transportation and reconditioning
|Slower turn times can sometimes lead to lower profit margins
Why use a long-term floorplan?
For many specialty dealers, turn times can be longer. It’s just a product of the business model. RVs tend to have a longer turn time; watercraft and powersports vehicles can move quickly on a seasonal basis, but they also tend to have longer turns. Also, dealers who focus on higher-end vehicles may sometimes find themselves waiting out a sale—so a longer term can help keep costs lower.
There are also a few other factors that could lead a dealer towards a longer term for a floorplan.
On average, it takes between seven and 10 days to get a vehicle frontline ready, and about five of those days are dedicated to reconditioning. This can be of particular concern to dealers who purchase frequently from salvage auctions and other sources of salvage inventory, who more frequently need recon time before selling a vehicle.
Depending on parts availability and staffing, a vehicle may be sitting in a garage for days before work even begins. A longer term allows extra time to get the vehicle frontline ready before payment is due so a dealer isn’t curtailing something that isn’t even on the lot yet.
An independent dealer based in Minneapolis is likely to have a slower season in November and December than they are in June and July. If you’re trying to sell motorcycles in Indiana in January, you may see less movement.
For many dealers, this is a reality. That doesn’t mean you’re taking winters off—it means you’re purchasing inventory in your “off season” to sell when people are ready to buy. For example, buy-here/pay-here dealers tend to see more traffic around tax season. So in September and October they’ll stock up, and then in January, February, and March they’ll sell those vehicles. This means a unit might be floored for weeks or even months before it is sold, making a longer term more cost efficient.
Today, it’s much easier to purchase inventory digitally through online auctions and apps. And that means while dealers are less bound by location, they need to consider the additional transit time that would come with a purchase.
Transit time and frontline prep extend the time from the moment of purchase to hitting the lot. In this case a dealer may prefer a longer term so they have the extra wiggle room to make a sale before a payment is due.
Why use a short-term floorplan?
In most other cases—that is, if none of the above situations apply to your dealership—a shorter term should get the job done. In particular, short-term floorplans are common choices for dealers who have (or expect) quick turn times, or who like to keep their inventory options fresh.
Short-term daily fee floorplans like AFC’s Daily Tab are also great options for dealers who are in the process of transitioning to floorplanning from paying only in cash. The simplicity of this kind of financing option makes it perfect for a dealer who’s just starting out.
The bottom line is the dealer’s bottom line.
It’s all about the gross profit margin
Depending on each individual dealer’s lot, market, and the specific floored unit, desirability of a long term vs. a short term will vary. Each and every dealer has their own business model and set of circumstances that better suits them to one or the other. And there’s nothing saying that a dealer can’t have a mix of both to meet all their account needs.
The bottom line is the dealer’s bottom line. No matter which term is selected, a dealer has to weigh the benefits and risks, and consider what the gross profit margin may be once carrying costs are deducted. To meet each dealer’s unique needs, auto finance companies offer a number of different automotive financial services and floorplan term options to empower them to choose the right term at the right time.
Disclaimer: The description of floor plan terms is general and actual terms and conditions of a floorplan are subject to the final written agreement between a dealer and its lender. Dealers should consider all factors prior to agreeing to a floorplan and consult with their own advisers to review the risks and advantages prior to signing an agreement.