For independent auto dealerships, effectively managing inventory and cash flow is necessary for your success. Dealer floorplan financing offers powerful benefits and can truly be a game-changer for your business but learning how to use it is essential for steering your dealership toward long-term success.
What is a Dealer Floorplan?
Before we dive into what not to do, let’s quickly recap. Think of a dealer floorplan as a revolving line of credit specifically designed to help independent dealers – like you! – purchase inventory. Instead of tying up your cash on hand, floorplan financing allows you to acquire vehicles from a wide variety of sources. Once a vehicle is sold or the loan is due, you repay the loan, similar to how a credit card works, but you get to keep the net profit. Check out our list of Do’s here.
The “Don’ts” of Smart Floorplan Usage:
When used incorrectly, a floorplan can create hurdles instead of opportunities. Here are the key “Don’ts” to keep in mind so you can strategically manage your floorplan.
DON’T Overextend Your Credit Line.
- It might be tempting to stock your lot to the brim, but rapidly accumulating inventory without a clear sales strategy can cause challenges. As with any line of credit, becoming overextended can strain cash flow because of increased carrying costs, including interest, fees and partial repayments. That’s why it is important to only floor inventory you are confident will sell within the terms of your financing agreement.
DON’T Ignore Term Lengths and Curtailments
- Floorplans don’t provide an unlimited timeframe for selling a vehicle, so it’s important to understand your provider’s repayment terms. Even before repayment, most floorplan agreements require curtailment payments, which are partial principal payments required at certain intervals if a vehicle hasn’t been sold yet. Curtailments can reduce the amount of interest paid and what is owed when a vehicle sells, but it’s really important to understand them so you can avoid a cash crunch.
- It is also important to choose term lengths that align with your typical sales cycle for different types of inventory. Shorter terms can be ideal for high-volume wholesale with quick sales, but longer terms might be better for salvage vehicles that need extensive reconditioning or inventory like RVs and powersports. AFC offers various flexible financing options such as Standard, Daily Tab and Principal Pass that align with the unique needs of your business.
DON’T Neglect Inventory Turnover
- The core principle of a successful floorplan is quick inventory turnover. The longer a vehicle sits on your lot, the more it costs you in interest and fees. Using sales strategies to move vehicles quickly allows for prompt payment of floorplan loans, ensuring you free up your credit line for new inventory.
DON’T Disregard Fees and Interest Rates
- While floorplans offer significant benefits, they also come with costs, primarily fees and interest, that you must factor into your vehicle pricing and profitability calculations. While the goal is to make more profit by selling more vehicles, ignoring fees and interests can unexpectedly eat away at your margins.
Prepare for Floorplanning Success
Floorplans are not a magic solution, but when approached with a clear strategy and responsible management, they are an important tool for independent dealerships. The success of any financing relationship begins long before you sign the dotted line. By avoiding these common pitfalls and working closely with your floorplan provider, you can better prepare your dealership for success and use your floorplan to help your dealership grow!
Ready to Accelerate Your Dealership’s Growth?*
AFC provides more than just floorplan financing; we offer tailored solutions designed to meet the unique needs of your business. Ready to get started? Check out this quick guide on how to apply for an AFC floorplan in three easy steps.
Have Questions? We’re Here to Help!
If you have any questions about the application process or how to get started, feel free to visit our Contact Us page.
Prefer to speak with someone directly? Call us at 1-888-335-6675, and we’ll be happy to assist you.
* Disclaimer: Descriptions of AFC floorplans are for illustrative purposes only. Terms of AFC floorplan financing are subject to a final written agreement acceptable with AFC. AFC does not guarantee any results for floorplan financing and examples are for illustrative purposes only. Dealers should consult their own advisors to make independent business decisions regarding floorplan financing. “AFC” refers to Automotive Finance Corporation, Automotive Finance Canada Inc., and AFC Cal, LLC in their respective jurisdictions
