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In it's simplest form, non-excessively peppered with financial terminology and equations: Floorplan is a line of credit dealers use to purchase their retail in

In it's simplest form, non-excessively peppered with financial terminology and equations: Floorplan is a line of credit dealers use to purchase their retail inventory. Each vehicle on the lot subjects the dealer to finance charges that begin accruing from the moment the dealer takes possession of the vehicle. So, say that the floorplan fees and interest are $100/day per vehicle (for simplicity's sake). The longer a car sits on the lot, the more profit the dealer is losing on that vehicle per day. Make sense? Why do dealers care? If you're being charged by the number of days a car is sitting on the lot, and a customer comes in an looks at a brand new, green car that arrived yesterday, and there is an identical twin in every way that is 400 days old, the salesman is going to push you to check out the older one and say they can make a special deal on it for some reason or another (sometimes they'll just say it's because it's been on the lot for a long time if they're really desperate). If you're paying interest on every product by the day, you want to get that out of your inventory as quickly as possible, because that's where you maximize your profit potential. Often, you can find vehicles on lots that are marked down lower than other similar/identical cars. This is almost always due to floorplan age (I'm assuming we are only talking about new cars here, because used cars bring in a lot of other variables). Some dealers operate in a way that they seek to capitalize on volume sales vs individual car sales as a way to both be more competitive and mitigate floorplan costs. These are often the best dealers to purchase from (and these are almost never luxury brand dealers) because they will typically sell every single vehicle at invoice price (or several hundred above), and build their profits instead around manufacturer incentives that pay out to the dealer $N per type of car in a graduated fashion where the payout increases as #s of types of cars sold increases. If you have a dealer in your area that advertises (and shows you the proof) that they sell at or near invoice, especially if that is their standard practice, you can safely assume they are a volume dealer. The salespersons are going to be focused on selling as many cars as they can because they are also making their income based on the number of cars sold, not a percentage of per-sale profits. Can you use this on the lot to your advantage? Sure. Just ask the dealer/salesperson how long the car has been on the lot.

refurb 13y ago
A question about floorplans: Is the floorplan cost flat? I ask because if you take into account both sunk costs and the fact that two identical models would have the same floorplan cost per day, why would they care to sell the older car first? Let's say you have two cars on the floor: Car A - just arrived Car B - sitting for 100 days The cost of the floorplan is $10/day (let's say) If a customer comes in and buys car A and then car B sits for another 10 days, how is that different than a customer coming in and buying car B and letting car A sit for 10 days? In the end it should cost the dealership the same. It's all about moving inventory, not necessarily moving specific inventory. I assume I'm missing something here, can you explain?
- bobwaycott 13y ago
  Well, floorplan financing is a finance vehicle like any other, so terms are different among participating providers. Also, I'm a bit unsure of what you mean by "sunk costs". Each vehicle ordered into inventory is an advance on the line of credit that has repayment fees and interest. Each vehicle sold then translates into paying the floorplan provider the advance amount + fees. In your example, I'm unsure of how you fail to see that Car B is already costing the dealership more money. But let's work it out anyway. Car A just arrived. Car B has been sitting for 100 days. Car A cost $20,000 and is on the lot for 0 days @ $10/day. Total repayment? $20,000. Car B cost $20,000 and is on the lot for 110 days @ $10/day. Total repayment? $21,100. If you were the dealer, would you want to lose that additional $1,100? I'm willing to bet it would matter to you. Complex case: You're in a floorplan agreement that requires repayment of advances in full (including accrued interest and fees) in n days. You damn well better sell enough specific inventory to cover this without losing profit. The longer specific inventory stays on the lot when you're repaying each period, the more screwed up your numbers become. It is about both moving inventory and moving specific inventory when that inventory is costing the dealer as much money as 10 other cars that sit on the lot for 20 days each. Moreover, the typical expected time-on-lot tends to be between 30-90 days. Floorplan terms are usually negotiated for these typical cycles. If a dealer is in a floorplan setup that is built for a 90-day max turnaround, and then has vehicles that sit around for 200+ days, that can add up to significantly higher fees per old car that eats into the profit margin. This is especially important with dealers who are selling based on a profit-per-vehicle basis, as opposed to the profit-per-level basis in use by volume dealers. Last thing you want to do (as a dealer) is strike a deal on a 200-day-old car that you had to strip to invoice price or below to sell, and then repay a floorplan advance + fees that exceed the sales price. It happens, but you still don't want it to happen. More important still, if a dealer is unable to keep moving inventory off their lot (whether through consumer sales, fleet sales, or dealer trades), then they have more inventory eating up their floorplan, diminishing the amount of inventory they can continue to purchase to replenish supply. Now, to balance all this out and try to create new profit centers that both put more cash in the bank and provide another opportunity to make money off a potentially negative car sale, we have the Dealer Finance Officer. An absolutely disgusting professional. But that is a different kind of discussion. You may already be familiar with how finance officers help increase dealer profits-per-sale.

refurb 13y ago

A question about floorplans: Is the floorplan cost flat? I ask because if you take into account both sunk costs and the fact that two identical models would have the same floorplan cost per day, why would they care to sell the older car first? Let's say you have two cars on the floor: Car A - just arrived Car B - sitting for 100 days The cost of the floorplan is $10/day (let's say) If a customer comes in and buys car A and then car B sits for another 10 days, how is that different than a customer coming in and buying car B and letting car A sit for 10 days? In the end it should cost the dealership the same. It's all about moving inventory, not necessarily moving specific inventory. I assume I'm missing something here, can you explain?

bobwaycott 13y ago
Well, floorplan financing is a finance vehicle like any other, so terms are different among participating providers. Also, I'm a bit unsure of what you mean by "sunk costs". Each vehicle ordered into inventory is an advance on the line of credit that has repayment fees and interest. Each vehicle sold then translates into paying the floorplan provider the advance amount + fees. In your example, I'm unsure of how you fail to see that Car B is already costing the dealership more money. But let's work it out anyway. Car A just arrived. Car B has been sitting for 100 days. Car A cost $20,000 and is on the lot for 0 days @ $10/day. Total repayment? $20,000. Car B cost $20,000 and is on the lot for 110 days @ $10/day. Total repayment? $21,100. If you were the dealer, would you want to lose that additional $1,100? I'm willing to bet it would matter to you. Complex case: You're in a floorplan agreement that requires repayment of advances in full (including accrued interest and fees) in n days. You damn well better sell enough specific inventory to cover this without losing profit. The longer specific inventory stays on the lot when you're repaying each period, the more screwed up your numbers become. It is about both moving inventory and moving specific inventory when that inventory is costing the dealer as much money as 10 other cars that sit on the lot for 20 days each. Moreover, the typical expected time-on-lot tends to be between 30-90 days. Floorplan terms are usually negotiated for these typical cycles. If a dealer is in a floorplan setup that is built for a 90-day max turnaround, and then has vehicles that sit around for 200+ days, that can add up to significantly higher fees per old car that eats into the profit margin. This is especially important with dealers who are selling based on a profit-per-vehicle basis, as opposed to the profit-per-level basis in use by volume dealers. Last thing you want to do (as a dealer) is strike a deal on a 200-day-old car that you had to strip to invoice price or below to sell, and then repay a floorplan advance + fees that exceed the sales price. It happens, but you still don't want it to happen. More important still, if a dealer is unable to keep moving inventory off their lot (whether through consumer sales, fleet sales, or dealer trades), then they have more inventory eating up their floorplan, diminishing the amount of inventory they can continue to purchase to replenish supply. Now, to balance all this out and try to create new profit centers that both put more cash in the bank and provide another opportunity to make money off a potentially negative car sale, we have the Dealer Finance Officer. An absolutely disgusting professional. But that is a different kind of discussion. You may already be familiar with how finance officers help increase dealer profits-per-sale.