Floor Planning: Definition, in Auto Sales

What Is Floor Planning?

Floor planning is a form of retailer financing for large ticket items displayed on showroom floors or lots. Specialty lenders, traditional banks, and finance arms of manufacturers provide the short-term loans to retailers to purchase items and they are then repaid as the items are sold.

Automobile dealerships utilize floor plan financing to run their new and used car businesses. Floor planning is a type of inventory financing.

Floor Planning Explained

Floor planning is offered by many types of lenders, big and small. Specialty finance companies fill an important role in providing credit for dealerships to purchase inventory. For example, dealerships for trucks, recreational vehicles, and boats, as well as home appliance retailers will turn to floor plan loans to purchase inventory.

In general, inventory financing is an asset-backed, revolving line of credit or short-term loan made to a company so it can purchase products for sale. Those products, or its inventory, serve as collateral for the loan if the business does not sell its products and cannot repay the loan. Inventory financing is especially useful for businesses that must pay their suppliers in a shorter period than it takes them to sell their inventory to customers. It also provides a solution to seasonal fluctuations in cash flows and can help a business achieve a higher sales volume - for example, by allowing a business to acquire extra inventory to sell during the holiday season.

Floor Planning in Auto Sales

Despite some consolidation in the car industry, the auto dealership industry is fragmented among thousands of independent dealerships, many of which have unique needs. Specialty financiers customize floor planning terms to suit the needs of these customers. If a new car dealership wishes to purchase 100 of the latest Lexus SUVs, it can take out a loan to buy the cars and, as the dealership sells them to its customers, repay the lender principal and interest. The loans are always collateralized by the purchased inventory, and in certain cases, by the building or property of the dealership.

Because of the fragmented nature of these dealerships, which suppresses economies of scale, financing expense tends to be higher than for a large corporate entity. Floor planning is a flexible way to finance inventory for a dealership, but in the cyclical industry of automobiles, it must be managed responsibly so that the financing cost burden does not exceed the dealership's capacity to repay.