Floor Plan 101

Floor Plan 101


Hello! I’m Thad Sykes, Divisional Vice
President in NextGear Capital. Welcome to financing inventory for growth – how to
successfully manage a floorplan line of credit. Today we will discuss what a
floor plan is, how a floor plan works, tips on lender compliance, and how to
apply for a floor plan line of credit. Let’s get started!
Floor planning is a term used to describe the practice of inventory
financing through a discretionary line of credit issued by a bank, finance
company, or private entity – in other words a floor plan provides additional capital
with which you may buy and stock inventory to sell at your dealership. Traditional floor plans from floor plan specific lenders typically have four
pricing characteristics, the first one you’re going to learn about is Interest Rates. Each
line of credit will usually have a specified interest rate that is charged
for the outstanding principal balance. The type of interest calculation that is
used can be different from lender to lender. Next on the list is known as a
Term. These lines will require payments to be made towards the outstanding
balance at certain maturity points; much like a traditional consumer car payment
your floor plan will require that the loan balance be reduced over a period of
time. The time between the flooring of a unit and the due date is commonly
referred to as Term. Most lenders will allow some flexibility in choosing what
length of time is available to you between terms. After Term we move on to
the Floor Plan Fee. Traditional floor plan lenders will charge a transactional
fee for each advance made against a piece of inventory. This fee is referred
to as a floor plan fee. The amount of that fee can vary from lender to lender and
is normally based on the lender’s standard practices, the amount of risk
they believe they are taking by extending the line of credit, and the
length time offered in the term. And finally we
have Curtailment. At the end of each term a payment is due to the lender. This payment is called a curtailment. In addition to having some flexibility in
the length of time offered in each term some lenders allow options as to how
much in the principal balance of a unit is required to be paid down at the end
of each term. It is good practice to choose a percentage based on the capital
position of your dealership and the price range of the inventory you plan
to stock using the line. One important thing to remember: floor plans do not
provide the same length of time as a consumer loan before a loan payoff is
due. Most floor plans provide for 90 to 180 days before a full payoff is due for
any given unit. Now, allow me to share with you how a floor plan works. A floor
plan transaction is really easy to follow – it mirrors the flow of any other
inventory purchase you would normally make for your dealership. Most floor plan
lenders will allow for inventory purchases from multiple types of seller,
this seller could be an auction, another independent dealer, a wholesaler, or
franchise store. This purchase could even be from a consumer in the form of a
direct purchase or a trade in. Now, following your acquisition of the inventory, the
deal is submitted to the floor plan lender for flooring. If the unit is
purchased at auction, the auction will typically have an online interface they
use to check your availability or how much room you have on your line of
credit. Auction houses will want to be sure you have sufficient room on your
line of credit to fit the purchase amount of the inventory. If you purchase from another dealer, you or the selling dealer will submit to
the lender for flooring. In these instances the lender will review the unit being
purchased to ensure that the unit’s value matches the amount you’re requesting. Provided the lender approves the funding or advance, the amount is then dispersed
either by ACH or check to your dealership or the seller. During the
transaction the seller is responsible for sending the title to the lender. Bear in mind that most lenders hold titles in house for collateralization
until the unit has been paid in full. Once the payoff is remade, your available
balance is increased with the reduced loan balance and you’re ready to floor
another unit. A floor plan can be set up to house multiple loans according to your
business needs. A typical floor plan can handle multiple flooring transactions in
various stages of their life cycle – whether it be flooring or paying off at
any given time. It’s great to see you again! Now that I
know you understand the basics, it’s time to dive in the floor plan compliance. Each
floor plan lender will require that your dealership sign a Promissory Note, often
referred to as your contract. Your contract will identify specific compliance
requirements for your dealership. To keep your floor plan line open and ready to
handle your transactions you’ll want to be sure your dealership remains
compliant. Here are a few things to pay close attention to: first, your dealer’s
license must remain current – allowing your license to expire will usually
cause you to be non-compliant with your lender. Next, you must pay your lender
promptly when a car is sold or disposed. Most often lenders view the time the
unit leaves the lot with, no intention of coming back, as the sale date or
disposition date. Each lender will identify a specific time line after the
sale when you’ll need to pay for the unit in full. Not paying a unit off when
you sell it can certainly cause issues with your line of credit; and can affect
the decisions that the lender makes as your line of credit needs to grow. Not
paying a unit off when you sell it can certainly cause issues with your line of
credit and can affect decisions that your lender makes as your credit line
needs to evolve. Remember the curtailment payments we talked about earlier, those
need to be made on time. Most lenders will provide you with some type of
online access – from managing your payment due dates and making those payments. Some
lenders now offer mobile applications that will allow you to do the same thing
while you’re on the go. Not paying your curtailment payments will certainly make
you non-compliant with your lender. It’s good practice to communicate with your
lender if cash flow problems arise and you believe you’re going to have a
legitimate reason to be late. Communicating with the lender can help you remain
compliant even when you’re avoiding late with your curtailment payment. Also of note
is that most floor plan lenders will require that you allow them to visit
your lot at regular intervals to inspect your inventory. This is called an Audit. This lets the lender confirm that the collateral for the line of credit
still exists. They’ll want to see that the inventory is in sellable condition and
is on your lot for sale. Due to the nature of selling used cars, most floor
plan providers know that some inventory will be in stages of reconditioning. They
know that you will need to send cars out for bodywork, oil changes, and tire. It’s
good practice to always know where your floor plan inventory is located and to
have addresses and names of any shops handy when the auditor asks for it. Keeping your audits compliant and smooth for the lender is always a good way to
show your lender your dealership’s operation is well organized. Now, normally
floor plan lenders will run a portion of your inventory insured against physical
damage. This is definitely an area that serves to protect both your dealership
and the lender, in the event you experience an unforeseen loss due to
damage of your inventory. Many lenders will supply you with their own insurance
policy if you don’t have one. A way you can save money is by using
your own insurance agent to purchase the policy. It is always a good idea to
compare these costs and make the best decision for your dealership. Ok, here’s
one last tip on compliance, your floor plan lender will likely monitor your
dealership credit and personal credit to be sure you don’t have any new negative
credit showing up during your relationship. From time to time they may
also search for liens or judgments, for this reason it’s important to stay
current on all of your financial obligations – in order to remain compliant
with your lender. If something unexpected pops up be sure to communicate with your
lender so that they can give you the best advice to minimize any disruptions in
your ability to use your line of credit. Now that we’ve talked about how a floor
plan works and the keys to floor plan compliance, you’ve probably started to get
an idea about whether having a floor plan makes sense for your dealership. There’s some pieces to think about when you begin to look for or apply for a
floor plan. At the top of the list should be how much of a line of credit you need. This is a serious question. After all, too much and you may over
leverage your capital; but too little and it may not support your inventory needs. A
good rule of thumb is to start with supply you want to stock for specific
length of time. Whether you want to stock a 30 day supply, a 45 day supply, or 60
day supply – there is a simple formula to decide how much capital you need. For a
great starting point to determine your needs, multiply the number of units you
would sell during that time period by your average wholesale cost. For example,
let’s say you typically stock a 45 day supply of units that average $5,000
wholesale and you sell on average 20 units a month. Multiply 20 units per
month by $5,000 this tells you you’re need is $100,000. Now, you may be wondering,
where can you use the line of credit? It’s important to know if the lender you
decide to use is an accepted payment method at the purchasing venue that you most
often use. Some regional lenders are accepted locally. If you purchase from
online auctions or auctions in another part of the country, you’ll want to be
sure your lender is also accepted there. If you most often acquire your inventory
through trade-ins or purchases from other dealers, you’ll want to ensure that
your lender can handle those types of transactions. The next question I get asked is, can your interest rate, terms, and fees be
customized? I mentioned earlier that terms, fees, and curtailment should match
your business model and available capital. While some lenders have set
programs, others will allow you to customize a plan just for your
dealership. It’s good practice to know and understand what your expected sales
margins will be, so you can figure out how much floor plan expense you can
absorb in each unit. Knowing this will help you determine what you’re willing
to pay and what’s a request from your lender. You will have to recognize that
the lending business is very much about risk versus reward in the eyes of the
lender. For example, if you’re a brand-new business with limited capital, you can
expect to pay a little bit more to balance the risk versus reward for the
lender. Yet another question I hear is this: Do lenders offer local
representation? If you’re the type of person that prefers someone you can get
to know during your relationship with the lender, it will be important for you
to know what they offer in terms of dealer representation. Some lenders
provide brick and mortar locations with local representatives, while some offer
centralized servicing and local reps that travel to your dealership. Whichever
you prefer, it’s important to communicate your needs with the lender. All of this
ties into the overall viability of your operation. A thriving business should be
building equity while reducing debt. A thriving dealer principle should be
building net worth, not acquiring debt to keep their business above water. If your
business isn’t building and growing, then you probably shouldn’t be seeking more
floor plan dollars. More flooring won’t turn around a failing business model. You
would just be adding more fuel to the fire. Instead, focus on perfecting your
operation. However, if your business is building equity and turning a profit,
having some additional buying power can
certainly help you shift into the next gear.

About the Author: Michael Flood

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