Car Dealership Floor Plan: How to Balance Cash Flow and Inventory

June 23, 2022

Team ACV

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Car Dealership Floor Plan: How to Balance Cash Flow and Inventory

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Used cars inside a car dealership showroom

Spoiler alert! A dealership floor plan is NOT how you arrange the cars in your dealership or even the layout of your showroom. It’s an inventory financing plan that can help your car dealership source and stock vehicles you may otherwise not be able to afford. 

So, what exactly is a dealer floor plan and how do they work? Read on for answers, advice for balancing a floor plan, and KPIs to help you decide if they’re right for your dealership. 

What is a Dealership Floor Plan?

A dealership floor plan loan is essentially a revolving line of credit. Like a credit card, you can charge large purchases to the floor plan and pay them off at the end of the month. A floor plan lets dealerships finance vehicles without fronting the cash.

Floor plans are available through lenders like banks and floor plan companies, or you can finance right here with ACV. ACV Capital puts competitive rates, flexible terms, and transparent financing options at car dealers’ fingertips. 

Dealership floor plans are an incredible way for dealerships to stock their lots. However, each vehicle that borrowers buy with the floorplan has to be paid back with interest. 

Like a credit card, you have to make wise purchases that you know you’ll be able to afford long-term with a dealer floor plan. This ultimately boils down to balancing inventory and cash flow. 

Prioritizing Inventory

Floor plans are classically pitched as a way for auto dealers to stock inventory they may not otherwise be able to afford. This is great because it lets car dealers keep more inventory on hand. 

Imagine a potential customer asking to test drive a vehicle you don't have in the showroom. Sometimes you can often divert them and let them drive other cars. But in general, buyers do a lot of research before ever stepping foot in the dealership and know exactly what vehicle they want. Having that exact vehicle (or at least some trim of it) in stock increases your chances of making a sale.

The financial freedom of being able to buy vehicles without fronting the money is appealing. It lets your dealership focus on inventory, helping you compete in the car market. 

Prioritizing Cash Flow

You can’t just stock whatever you want without protecting your cash flow. Remember, you’ll have to pay a floor plan back at the end of the month (or whatever your plan dates indicate). 

Floor plans have high-interest rates, making carrying a balance expensive. Do your dealership sales and projections vary greatly from month to month? If so, it may be better to focus on stabilizing sales and become more consistent before taking on a floor plan. This way the loan doesn't set you up for debt that you won't be able to manage.

Like any type of debt, auto dealer floor plans have an impact on your business credit score. Before taking a floor plan out, check your business credit score with one of the three major bureaus (Equifax, Experian, and Dun and Bradstreet) as a baseline. Taking on new debt will always cause a dip in your credit score. So make sure you don't need a high credit score for anything within a few months of starting the floor plan. Similarly, you'll end up with better terms and interest rates if you don't take out any other loans around the same time as applying.

When it comes to your cash flow, you'll want to ensure you can consistently meet your financial targets before taking out a car floor plan. Note that missing payments will tank your credit score and put you into debt.

Metrics to Consider

When deciding whether a dealership floor plan is right for you, there are a few dealership KPIs to consider. Your floorplan provider will also need this sales data, so spend time gathering and analyzing it before you apply for financing. 

Here are four dealership KPIs to keep track of if you’re considering or actively using a floor plan. 

Average Monthly Sales

This one’s pretty self-explanatory. What are your auto dealership’s average monthly sales? This tells you what your dealership is capable of comfortably selling. You don’t want to take out a floor plan that exceeds (or even comes close to) this number, to ensure you’ll be able to pay it back. 

Inventory Turn Rate

Your turnover rate describes how many times you turn your full vehicle inventory over in a year. Essentially, how many sales cycles in a year. Some floor plans (including ACV Capital) let you fix your financing around turn time rather than months. This way you can finance as fast or as slow as your dealership moves units. 

Average Used Vehicle Price

Find out how much you’re spending on average on each unit. Whether you buy auction cars online, pay for trade-ins, or run buyback programs, you’ll want to know how much you spend on each unit. This will factor greatly into what your floor plan financing looks like. 

Average Number of Cars on Lot

At any point in time, how many cars are on your lot? Knowing the average number of cars on your lot and the average used vehicle price (above) will help you and your floor plan provider. This way you can understand how much you’re spending and what your stock looks like for each inventory turn. 

Is a Floor Plan Right For Your Dealership?

Whether or not a floor plan is right for your dealership all comes down to making smart money decisions. Prioritize only financing what’s realistic for you to sell. If your sales are stable and you’re feeling confident about sales projections, then a floor plan may be right for you. 

Register for our floor plan option ACV Capital and start financing great inventory. We look forward to working with you at ACV Auctions!