Floor Financing in Automotive Dealerships
Floor financing is an arrangement between an automotive dealership and a financial institution that allows the dealership to acquire vehicles without upfront payment. The lender provides a line of credit to the dealership that is repaid when the vehicles are sold.
The dealer borrows money through “floor plan financing” to keep inventory on their lots. This short-term loan is paid off typically in 30 to 90 days, the average time to sell a vehicle.
Types and Calculations in Floor Financing
Floor plan financing is used to finance the acquisition of vehicles held for sale or lease. It is common in car dealerships as vehicles themselves secure the loan. Interest on floor plans can be calculated by dividing monthly desired sales by the inventory turnover rate per year and multiplying by 12 months.
Understanding Floor Plans at Dealerships
Floor financing enables dealerships to acquire inventory without significant upfront costs, using the vehicles themselves as collateral on short-term loans until they are sold. This practice is crucial for car dealerships to maintain a well-stocked inventory.