Dealer floor plan financing is how most dealerships can afford to maintain an impressive showroom—but don’t get on the bank’s bad side
Unless you’re independently wealthy, there’s a solid chance you’re not paying directly out-of-pocket for all of the vehicles on your dealership’s lot. Dealer floor plan lending makes it possible for you to maintain an updated inventory and then pay the financing company back each time you sell a vehicle. For dealerships that follow the rules, floor planning can prove to be an excellent business agreement between the lender, manufacturer, and dealer.
For dealer floor plan lenders, however, there can be quite a bit of risk involved as they don’t have full control over the loan collateral—the vehicles. Because of this, they don’t just sit around and wait to be paid every time you sell a car. The lenders take an active role in protecting their collateral and trying to ensure that dealerships don’t default on their loans. The primary way that they accomplish this is through regular scheduled—and unscheduled—audits.
Want to have perfect dealer floor plan audits every time? Don’t make these errors.
Audits aren’t fun. There’s nothing more annoying than when you’re having a busy, hectic day and someone walks in from the bank for a surprise audit. These dealer floor plan lenders, however, make it possible for your dealership to operate—so when they come to visit, you need to make sure you’ve crossed your t’s, dotted your i’s, and have everything organized and ready for them.
Here are a five mistakes you don’t want to make during a dealer floor plan audit:
1. You don’t have one person in charge of audits.
If an auditor walks into your dealership, there should be no question as to who is managing the situation. Appoint one employee—like the assistant office manager—and then choose someone to be an alternate in the event the first person is off or away on vacation. When too many people are involved, things just get messy.
2. You don’t have titles organized and available.
One of the easiest ways for auditors to account for your inventory is to pair a title with a vehicle. If you can’t produce a title for even just one of the cars, this is a red flag to the auditor and will make them think twice about whether or not you are a trustworthy business to lend to. Titles should be properly stored and organized and easily accessible at a moment’s notice.
3. You can’t account for every car.
The auditor has a couple of cars on his list that don’t seem to be in your showroom—you assure him that they were just moved to another location for a sale, but how can he know for sure? If you’re planning to move inventory, notify the lender ahead of time, so there are no surprises during your audit.
4. You aren’t turning cars quickly enough.
If the auditor sees vehicles on your lot that should have been sold a long time ago, he’s going to get nervous and wonder where the disconnect is. Are you taking on too much credit and don’t have the sales numbers to back it up? Don’t buy more than you can sell, because you’ll still be on the hook for paying the dealer floor plan lender back.
5. You lie.
The moment an auditor catches you in a lie you’ve instantly lost your credibility. You may be struggling to meet sales projections or lost the title for a vehicle, but you must be proactive, honest, and honorable. The lender will be much more likely to work with you and help when things go bad if you have a solid, honest relationship with your auditor.
Dealer floor plan lenders are like most financial institutions, so if you make too many mistakes, you may end up being noncompliant with the terms of the loan. If this occurs, what happens next probably won’t be pretty.
- The collateral could be repossessed, leaving you without inventory.
- You might kill your dealership’s credit, making it next to impossible to find a new lender willing to take a risk on you.
- The lender may take legal action against you.
- You might have to pay back any remaining balance to the lender, which could result in you losing your dealership.
The risks related to noncompliance are quite serious and have the potential to affect the future of your dealership. If you stay on the straight and narrow, though, and follow the rules your lender has set forth, you will likely have a long, profitable relationship together.
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Frequently asked questions
Questions About This Topic
What is dealer floor plan financing?
It's a lending arrangement that allows dealerships to maintain an updated inventory of vehicles without paying for them entirely out of pocket, paying the financing company back as each vehicle sells.
Why do floor plan lenders conduct audits?
Because lenders don't have full physical control over their loan collateral — the vehicles — they use regular scheduled and unscheduled audits to actively protect their collateral and make sure dealerships aren't defaulting on their loans.
What is one of the biggest mistakes a dealership can make during a floor plan audit?
Not having titles organized and readily available is a major red flag — if an auditor can't match a title to a vehicle, it raises doubts about the dealership's trustworthiness as a borrower. Titles should be properly stored and easily accessible at a moment's notice.
What can happen if a dealership is found noncompliant with its floor plan lender's terms?
Consequences can include the lender repossessing the collateral and leaving the dealership without inventory, damage to the dealership's credit that makes finding a new lender difficult, legal action, or being required to pay back the remaining loan balance, any of which can put the dealership's future at risk.
