What it means
Dealers who stock big-ticket goods cannot normally pay cash for every item on the lot. A floor plan lender, often a bank or a finance arm linked to the manufacturer, pays the manufacturer directly for each unit.
The dealer then owes the lender the purchase price plus interest and fees until the unit is sold. The loan is secured by the stock, and each item is tracked by its serial or vehicle number.
When a unit is sold, the dealer must repay that particular advance within a short period, often a matter of days. Lenders check the lot regularly to confirm that financed items are still there, because selling an item without repaying the loan, called selling out of trust, is a serious breach.
Interest is usually calculated daily on the amount outstanding for each unit. Some lenders also require the dealer to make curtailment payments, which are partial repayments that reduce the balance as an item ages on the lot.
This encourages dealers to sell older stock rather than letting it sit. For the dealer, floor plan financing frees working capital for other uses such as marketing, staff and facilities.
It also lets the dealer carry a wider range of stock, which attracts more customers. The trade-off is that interest accumulates for every day a unit remains unsold, so slow stock is expensive.
Manufacturers sometimes subsidise floor plan interest for an initial period to encourage dealers to stock new models. Finance teams should track floor plan interest as a separate line, along with days on lot and inventory turnover, because these numbers show whether the dealership is managing stock efficiently.
Lenders also look at the dealer's overall health. They review financial statements, check how quickly previous stock sold, and set a credit limit that matches the dealership's size and track record.
A dealer with a record of late repayment may face lower limits, higher rates or more frequent inspections of the lot.
In practice
Real-world examples.
Example
A boat dealer finances 12 new boats through a floor plan. Each time a boat is sold, the dealer repays the lender for that vessel and can then order a replacement. The boats are checked by the lender's auditor every month to confirm they are still in stock.
Example
A farm machinery dealer receives tractors from a manufacturer with a 90-day interest-free floor plan period. The dealer tries to sell as many as possible before interest begins. The dealer treats the interest-free period as a deadline for pushing sales and promotions.
Example
A used car dealer faces curtailment payments after 120 days on the lot. The finance manager reviews ageing stock weekly and marks down cars that are approaching the deadline. The aim is to avoid curtailment payments that would drain cash while the cars remain unsold.
Formula
Calculation
Floor plan interest = Amount financed x Annual interest rate x Days outstanding / 360
Metro Motors, a fictional dealership, finances $800,000 of vehicles at an annual rate of 8%, and the average car stays on the lot for 90 days. Using a 360-day year, interest is $800,000 x 0.08 x 90 / 360 = $64,000 x 0.25 = $16,000. If the average days on lot fall to 60, interest becomes $800,000 x 0.08 x 60 / 360 = $10,667 to the nearest dollar. Selling stock 30 days faster saves about $5,333 on this inventory.Case study
Seen in the real world.
Lakeview RV is an illustrative, fictional caravan dealer that stocked 60 units using floor plan financing. During a slow season, the average unit stayed on the lot for 150 days, and interest costs climbed steadily.
The finance manager discovered that the dealership's interest bill had reached $9,000 a month, and that the oldest ten units were costing more in interest than they would earn in margin. He introduced a rule to discount any unit older than 90 days and to stop ordering slow-selling models.
In the illustrative result, the average days on lot fell to 85 within six months, and the monthly interest bill dropped to $5,500. The dealer used the savings to fund a local advertising campaign that further improved sales. Lakeview now reports days on lot and floor plan interest per unit in its weekly dashboard, so that managers see the cost of delay.
Watch out
Common mistakes.
- Selling a financed unit and delaying repayment to the lender, which is a breach known as selling out of trust.
- Ignoring the cost of slow stock, when each additional day increases interest.
- Treating the floor plan loan as ordinary working capital, when it is tied to specific items and must be repaid as they sell.
Questions
People also ask.
What does floor plan mean in finance?
It refers to financing for dealer inventory, where the inventory is the collateral and each unit is repaid on sale.
Who uses floor plan financing?
Dealers of cars, boats, motorcycles, caravans, farm equipment and appliances commonly use it.
What is a curtailment payment?
It is a partial repayment required as a financed item ages, which reduces the balance outstanding.
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