How Do Car Dealers Finance Their Inventory – The terms “planning” and “planning financing” are often thrown around in dealer and auction circles. But what do these terms really mean and how does plan financing work?
To put it simply, floor plans and floor plan financing work almost like a credit card intended for vehicle purchases.
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Credit cards are issued by a bank to an individual. Individuals can then buy personal goods with money borrowed from the bank. Money borrowed from the bank bears interest, and you have the option of either making minimum payments or paying the bill in full when it falls due.
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Like a credit card, a plan finance company extends a line of credit to a car dealer. Sellers can then use their floor plan to purchase inventory from auctions and other inventory sources. If a dealer buys a car on a plan, takes it back to their lot and doesn’t sell it within the days specified in the agreement, the dealers are charged a small fee. When a trader sells their inventory, they repay the original loan.
With a floor plan, the initial investment required to purchase a particular unit is a fraction of the actual purchase price of the vehicle. As soon as that vehicle is sold to a consumer, floor plan dealers have the opportunity to realize profits immediately, repay the initial cost of the loan plus interest and fees, and have the flexibility to put their money to work for their dealership.
Floor plan financing companies are specifically tailored to the needs of car dealers. Using cash or a bank line of credit to purchase inventory may work for some car dealers, but many plan finance companies offer different dealer-specific benefits. In addition to freeing up the dealer’s cash on hand, other benefits of floor plan financing can include additional flexibility in paying off a particular inventory, payment extensions and credit enhancements if needed. Other services are also often offered which may include record management, dealer status, security protection and title services depending on sophisticated online and mobile account management tools.
While floor plan financing may seem like a confusing concept, in practice it can be an extremely profitable business strategy for car dealers.
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Do you want to know more about floor plan financing? Contact us and we’ll tell you how you can do more as a NextGear Capital dealer. Two crossed lines forming an “X”. This indicates how to stop the interaction or discard the notification.
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In late 2022 and early this year, car buyers will begin to see more vehicles on dealership lots. Kekyalyainen / Shutterstock.com
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In recent months, car dealers have seen more vehicles on dealership lots than in a long time. That means after more than two years of little choice at retailers, consumers may be in luck — but not that much.
Before the pandemic, car dealers had at least enough cars on the lot or on order for about a 60-day supply.
Then, COVID-19 limited production, leading to fewer options and increased prices, as retailers’ supplies dwindled to as much as a month’s worth. Things got better in the back half of 2022 as production returned and demand eased. Cox Automotive reached a 53-day inventory of new vehicles in November, the highest since March 2021. This was up from 50 days in October and 40 days in September.
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“We’re never going to get back to the inventory levels we’ve had before,” GM CEO Mary Barra told analysts at the Wolf Research conference last February.
Executives at Ford and Stellantis (the Detroit-based parent company of Fiat Chrysler and PSA Group) have expressed similar views in recent months.
“Domestic brands have a 30-, 40-day delivery, which is still very low compared to historical levels,” said Jack Crelle, industry analyst at Trucar.
“It’s certainly better than a year ago,” Krell added, “but it’s nowhere near the level of abundance that it was.”
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That may be because automakers have learned in recent years that customers will wait and pay for what they want. If they could return to pre-pandemic inventory and eliminate supply chain issues, car buyers have adapted to pandemic-induced trends.
Consumers have taught automakers that they don’t need a lot of inventory on dealer lots to make money. David Jalubowski/AP
A recent study by consulting firm Deloitte found that 48% of American consumers would not mind waiting anywhere from three weeks to three months for their next vehicle. Deloitte said a change in attitude about waiting times could open the door to more “built to order” sales, making large inventories less necessary.
“The customer orders the vehicle, and then we ship the vehicle to the customer,” Farley said on the second-quarter earnings call. “That’s what I mean by the low inventory model.”
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That doesn’t mean consumers should struggle to afford any vehicles, but unless it requires automakers to add cash to inventory, prices could remain high ($46,382 per new car in December on average, per J.D. Power). and the dealers have incentives to offer the customers. There is no reason to.
Perhaps there will be one or two prominent brands that decide to capitalize on customer frustration. “I expect there will be a haircut like we saw years ago,” Edmonds’ Evan Drury said. But, “they won’t match supply and demand perfectly one-to-one.
“I fully expect someone to break away from the pack and really increase their sales by having more listings and offering these discounts.” When you look at the rows and rows of cars available at the car dealership, you may be wondering what to do. Do car dealers own the cars they sell? The short answer is that it depends on the dealer. Car dealers buy and own the cars on their lots, or they use special financing programs available through manufacturers.
They then sell these cars to customers at a higher price to see a profit and handle the general costs of running the dealership. Dealers can buy cars on their lots from a number of sources, from trade-ins and auctions to buying directly from the manufacturer.
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Most car dealers acquire their vehicles using a tool called ‘planning finance’. This helps them keep a large inventory of vehicles available to drive out as soon as they are purchased. Until the time the vehicle is sold, the financier or lender holds the car’s title instead of the dealer.
Car dealers use floor plans to finance a wide selection of cars. By maintaining a wide selection, dealers are able to meet customer needs without delay in terms of vehicle delivery and transfer of ownership. If this financing option wasn’t available at dealerships, many customers would be forced to buy their cars through a catalog that could take months to get to a dealership.
The lender for plan financing is often the vehicle’s manufacturer. They offer the dealer a budget, for example, they can extend a $2 million loan for 100 cars over the course of a year. The dealer pays the manufacturer while the car is on the dealer’s lot. This creates additional incentives to sell cars faster.
The lender will often check the dealer’s inventory and if the car is taking too long to sell, they may ask the dealer to pay for the vehicle upfront to avoid financial loss due to the car’s value decreasing over time.
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Many used car dealers also use floor plan financing, but they can also own the vehicles on their lot. This is something you will see more often at used car dealers because of the low cost of used cars. Used car dealers can buy cars through trade-ins or auctions where the price of the car is much lower than when it is bought new directly from the manufacturer.
Car dealers do not pay tax on vehicles on their premises. They don’t pay taxes because they are a franchise, so it works a lot when you buy items from a grocery store. Essentially, the tax is passed on to customers as a sales tax.
You pay VAT when you buy the vehicle and then the dealer
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