Is Your Floorplan Financing Helping or Hurting?

Article by: Jonathan Pumphrey

Every dealer is familiar with floorplan financing. Floor planning is an essential element in modern dealership operations. And while the interest paid on floorplan financing is in many cases simply the cost of doing business, there are key KPIs you can use to assess how much your current floorplan financing is helping or hurting your bottom line.

Ex bankers’ advice on floorplan financing

Floorplan financing is an integral part of every dealerships capital structure, whether it's for New Vehicles, Used Vehicles, RVs, Powersports or anything in between. Though the concept of floorplan financing is not new and on the surface they may all appear to be the same, the terms and conditions outlined within your credit agreement may significantly vary from one financial institution to the next. Franchised New Car Dealerships tend to have an advantage on the Terms and Conditions with respect to bank financing as the manufacturers provide the financial institutions with "repurchase agreements". These repurchase agreements provide the bank with an added layer of comfort as in the unlikely event a dealer is in a distressed situation, the bank may rely on the Manufacturer to purchase back the inventory being financed, which reduces the banks risk on those assets. The repurchase agreements vary between the manufacturer and respective financial institution, but to keep things simple, in general one can assume that the repurchase agreement on New Vehicles expires after 364 days from the time it lands on the floorplan and invoiced by the manufacturer.

On the surface level, credit limit and interest rate tend to be the main focus and while those two categories are important, other factors outlined throughout the Terms and Conditions should be considered;

Advance Rates

New Vehicle Advance rates are typically 100% of the overall cost of the unit from the manufacturer. The Floorplan will sometimes allow your GST and Freight to be included. In those instances the GST and Freight need to be repaid in the first 60 days from the advance. When it comes to new units there isn't much variance between the advance rates.

Used vehicle advance rates can vary significantly between financial institutions. With the increase in price on used vehicles throughout COVID, the financing terms and conditions for these units have improved to reflect the demand for these units. As with anything in business, with increased risk comes increased cost. As there is no repurchase agreement for used units, there is inherently more risk associated with them. Expect to see higher interest rates on Used Vehicle Floorplan financing VS New Vehicle Floorplan for the standard model year range and an even higher interest rate if you're looking to finance unique items such as RVs, trailers, marine and older used units.

Curtailments

Arguably one of the most important terms and conditions with respect to Dealership Financing as this will have a direct impact on your cashflows;

New Vehicle curtailments typically reflect that of the repurchase agreements the manufacturers have with the respective financial institution. In fact the financial institutions curtailment schedules are often more favorable for the dealer than the terms they have with the manufacturer. Curtailments for New Vehicles typically begin after a year from the invoice date. All dealers would agree, they don't want to be holding inventory for such a long period of time but it happens, and when it does it will negatively impact cashflows.

Used Vehicle curtailments are typically much shorter than the new as used units should be turning every 60 to 90 days, and the curtailment schedules reflect that. The appetite for Used Flooring varies between the banks as noted in the "Advance Rate" section and the longer the interest only + Curtailment period is, the more risk the bank is taking and you can expect to pay higher interest rates.

Interest Offset Account

Some financial institutions allow dealers to apply their excess cash to an Interest Offset account, which will pay the dealer the same amount of interest they're charged up to a certain amount. It affords the dealer with the interest rate savings of paying out units without the administrative burden of doing so. Funds are fairly liquid and can typically be accessed within 24 hours of request. This could be viewed as either Interest Rate Savings OR a short term High Interest Savings Account. These offset accounts are not always available and often times are only available against the New Vehicle Floorplan for franchised car dealerships.

When it comes to floorplan financing, although interest rates and credit limits are important the terms and conditions will ultimately have a greater impact on your overall operations. More flexible terms and conditions will result in higher interest rates but in the long run, these more flexible conditions may allow you to generate more profit which more than offsets the increased interest rates.

QUOTUS Essential KPIs for Floor Planning

Tracking specific KPIs gives you the insight needed to keep floorplan financing costs in check. Here are the most meaningful KPIs that every dealer should monitor:

1. Interest-Floorplan as a % of Gross Profit: Measures how much of your gross profit is consumed by floorplan interest payments. A high percentage indicates that floorplan costs are eroding your profits.
2. Interest-Floorplan per Retail Unit (New and Used): Tracks the average cost of floorplan interest per vehicle sold. Helps identify if you're paying too much in financing per vehicle.
3. Inventory Turnover Rate: Measures how quickly your inventory is sold and replaced over a given period. A high turnover means less time paying interest, reducing floorplan costs.
4. Demo and Inventory Vehicle Expenses: The cost of maintaining demo and unsold inventory vehicles. Excessive expenses without corresponding sales can indicate inefficient inventory management.
5. Total Floor Plan Liability: Knowing your total outstanding floor plan balance is essential. It gives you a clear picture of how much financial exposure your dealership has at any given time.

How to Keep Floorplan Costs in Check

Managing floorplan financing isn’t just about monitoring your inventory; it’s about ensuring the financing terms work in favor of your profitability. Here are strategies to keep your floorplan costs under control:

1. Negotiate Terms: Always seek better loan terms, whether through a bank, manufacturer, or specialty lender. Lower interest rates and flexible repayment schedules can significantly impact your costs.
2. Monitor KPIs Regularly: Use the KPIs listed above to keep an eye on your floorplan costs. Early detection of rising financing expenses allows you to make adjustments before they affect profitability.
3. Optimize Inventory Levels: Stocking too many vehicles can lead to excessive floorplan costs. Aim to maintain inventory levels that match demand and sales rates.
4. Maintain Cash Flow: Even though floor planning provides flexibility, it's essential to ensure you have enough cash flow to cover interest payments when they come due.

Conclusion: The Importance of Monitoring Floorplan KPIs

Floorplan financing is a critical tool for dealerships, enabling you to keep your lot stocked without upfront capital. However, this financing must be managed carefully. By tracking key KPIs, you can ensure that floorplan financing works for your dealership rather than against it.

Regularly reviewing these key metrics will help you optimize your financing costs, maintain a well-stocked inventory, and ultimately boost your profitability. Floor planning offers flexibility, but it’s essential to manage it smartly to ensure long-term success for your dealership.