Floor Plan Financing

Floor planning is a type of asset-based financing.  It is a method of financing the inventory of a business. Although many types of inventory can be floor planned, the best known example is the financing of vehicles for an automobile dealership. The structures of a floor plan may vary, but a floor common plan would normally work this way:

A lender enters into a revolving credit agreement with an Auto Dealer to finance the purchase of cars from a Manufacturer.  The lender sends the proceeds of the loan directly to the manufacturer and takes a purchase money security interest in the vehicles. As the Auto Dealer sells each car, the loan advance (or portion of the loan secured by that vehicle) is immediately paid to the lender. While the vehicle sits on the Dealer's lot, the Lender may require periodic payments on the loan notwithstanding the fact that the vehicle has not yet been sold.  The Lender may also periodically visit the Dealer to: (1) count the vehicles in inventory and (2) review sales records and other documents to ensure that the Dealer is remitting payment to the lender as soon as a vehicle is sold.

Lines of credit to finance a floor plan ensure that a company will have inventory in place when sales opportunities arise. Terms of repayment are matched to the nature of the business.  For example, special provisions such as seasonal adjustments to periodic payments can be made part of the contract between the Lender and the borrower.  Typically, the terms of repayment are consistent with the typical sales cycle or an industry standard inventory turnover rate.  

In the case of the auto industry, Manufacturers can provide special terms to their Dealers.  Many large banks including CitiBank, and specialty financing firms including G.E. Capital offer floor plan financing in certain industries.

Edited by Michael C. Dennis.  Michael is a consultant, author and lecturer.  He can be reached at mcdennis13@yahoo.com