Flooring credit is a type of short loan given to retailers for the purchase of high inventory like automobiles. It is used by mainly new and used car dealers. Floor plan financing is a revolving line of credit that allows the borrower to obtain financing for retail goods. These loans are made against a specific piece of collateral. When each piece of collateral is sold by the dealer, the loan advance against that piece of collateral is repaid. It involves three parties, the supplier of goods, the dealer and the financial institution. Legal documents are involved and they facilitate an arrangement of guarantee that payment will be made to the supplier. When a dealer enters into an agreement with the financial institution a master loan agreement is created. It indicates the conditions of the relationship and agreement between the dealer and the institution.
Types of collateral securities in Flooring Credit
#1 the Car Itself
The lender holds on to the car title until the loan is paid off, and the car changes ownership. If the borrower defaults on the loan during this period of time, the lender seizes the asset
#2 another Vehicle
The most obvious source of additional collateral is another vehicle. If a borrower wholly or partly owns a second car, the equity owned in this car can be placed as an asset on the new car loan
#3 Home Equity
Home equity is a solid source of collateral for a number of large loans. A home’s value tends to go up over time, which means the collateral maintains a stable or increasing value. This helps protect the lender from the possibility an asset may be worth less when seized to recover loan payments than it was when the loan was issued. Added protections on the loan tend to make loan rates even lower. A borrower does not need to fully own a home in order to use it as collateral. Even 20% ownership in a home can generate the equity needed to serve as collateral on a car loan
#4 Stock Certificates
A lender can hold the certificates in trust while the loan is alive. If you default on the loan, the lender can seize and liquidate the stocks to cover losses. The biggest benefit with this option is you continue earning dividends and interest on the stocks while they are held. This essentially reduces the cost of the interest on the loan.
#5 Savings Accounts
A savings account can be used as an easy collateral option. This interest can be deducted from the interest rate on the auto loan to reflect the real expense of the loan. You will not be able to deduct the portion of the account that is serving as collateral while the loan is alive
It is a method of acquiring inventory but can lead to negative consequences if payment is not made on time.It is a very basic process, whereby you open a line of credit, sell the inventory and pay back the loan. A dealer floor plan is basically like a revolving line of credit. Your bank may give you a $50,000, $100,000, or even a $1,000,000 dealer floor plan although I recommend starting small with a $10,000 or $20,000 loan. After you obtain a dealer floor plan you may then purchase your inventory with your dealer floor plan. When you sell a vehicle, your bank will require that you pay off the portion of the loan that was used to purchase that vehicle
For example, let’s say you purchase a vehicle at an auction for $5,000 then sell the vehicle the following week for $7,500. The bank would require you to pay $5,000, plus interest, on your dealer floor plan while you keep the $2,500 profit. A bank will charge you a certain amount of monthly interest for your unpaid balance every month. The only disadvantage of this is the interest paid every month on a large dealer floor plan. You might have a couple of slow months which could lead to you not being able to make your payments which could lead to your entire inventory being repossessed by your dealer floor plan company. make payments on your floorplan even if you have not sold any vehicles. You should try to have at least six months of your minimum floorplan payments on hand in cash so you can still make your payments
Floor plan helps the dealers
- obtain and maintain inventory through access to capital
- Limit dealer expense through competitive rates and fees
- Provide complete service to the dealer from inventory acquisition forward
- Designed specifically for the Subprime and BHPH dealers
- Credit lines customized to fit your business needs
- Competitive rates and fees
- CAR funds both Auction
- Direct and Non-Auction auto acquisition
- Monthly audits required with NO audit fees!
The common mistakes made in the floor plan’
- Mismanaging the cash flow
Improper cash management may cause dealers to get into a tight borrowing cycle. Cash flow is the number one key to a successful business. It can positively and negatively affect everything from advertising and staffing to acquiring business tools. One of the benefits of floor planning is it frees up cash for other expenses and business investments
- Over Extending
It’s important to manage your line of credit so that you can grow your business responsibly. One scenario that happens far too often is dealers over-extending themselves when it comes to inventory. When you purchase more inventory than you can sell, you put yourself at risk if you can’t make the payments.For instance Just because you are approved for a $250,000 line of credit doesn’t mean you have to go out and spend it all at the next auction. Buy in proportion to your sales figures.
- Communicate Inadequately with Floor Plan Provider
floor plan provider must be kept abreast of any changes, updates or issues regarding your business. If you have a payment that you know in advance you won’t be able to make, let them know as soon as possible
- Raise Red Flags
Most floor plan providers keep an check on all accounts in search of red flags that alert them to issues with dealers. There are three specific red flags that your floor plan company is watching for: NSF’s, Collateral Audits and Turn-times
When you can’t make your payments on time, or your checks/ACH’s bounce, rest assured that your floor plan provider is now watching your account closely. This is one of the biggest indicators that there is an issue with how you’re managing your account and ultimately how the creditor views their chances of being repaid. This puts the floor plan provider at risk as they advanced funds on a certain piece of collateral.
Your floor plan company is a collateral-based lender. And that collateral is the physical inventory – not the title of the vehicle. As with any lender, it’s important that the collateral can be physically verified based on the agreed terms, usually monthly. When your floor plan provider can’t verify inventory, another flag is raised. If you need to move inventory to another location for a big tent sale or to an auction, let your floor plan provider know.
This may not fit all dealer’s business models; however, your floor plan company is going to get nervous if they see a vehicle on your lot for an extended period. Many times dealers hold inventory “looking for the right buyer” instead of cutting their loss and moving the unit at an auction. This allows them to acquire fresh inventory to market to customers.
5.Improperly Manage Account
When you have a floor plan, it is implied that you understand the expectations of the company. Find out when payments are due, properly managing the accounts helps to run your business successfully.
METHODS OF FLOORING CREDIT
There are two basic floor planning programs known as “pay as sold” and “scheduled pay”.
PAY AS SOLD FLOORING
In this program the dealer pays the floor planning company as and when he sells the goods to the consumers. This facility is available only for serially numbered items. This allows the floor planning company to keep a track of the items. This program involves a monthly floor check. In this scenario a maturity date is set for the items. it can usually range from six to nine months. When the maturity date is reached the dealer has to start paying for the items that have not been sold. The amount is generally ten percent of the invoice value of the item per month.
SCHEDULED PAY FLOORING
In this scenario the dealer pays the floor planning company in installments. The period is generally between six to twelve months , i.e, the dealer pays the company in six to twelve installments. Serial numbering is not required in this case and hence no floor check is involved.
Floor plans are a wonderful thing if you are willing to take the necessary steps to keep track of your floored merchandise. Without flooring, many of the retailers in the industry would have grown much slower.