How Does a Dealer Floor Plan Work?

image of a flow chart to show how does a dealer floor plan workThe concept of a dealer floor plan is pretty simple: a floor planning lender gives a dealer a line of credit to purchase inventory. However, in the context of daily dealer activities, how does a dealer floor plan work? From winning a bid at a local auction to moving inventory to your lot, there are many unique advantages that a dealer floor plan has to offer, including ease of use and expediting the buying process. Below we have listed the general process for floor planning at an auto auction.

How does a dealer floor plan work? It typically begins at an auto auction…
Using a line of credit begins when a dealer wins a bid for a vehicle at auction. Typically a dealer will be asked how they want to pay for the vehicle. For dealers with a floor plan, they will tell the auction to use the line of credit from their floor plan provider to pay for the purchase.

From that point, the auction will check on the dealer’s line of credit. The auction will send information about the dealer’s purchase to the floor plan provider for funding and approval. Once the purchase is approved by the floor planning lender, the auction will stamp and approve the bill of sale or vehicle gate pass. This shows that the car was paid for, and means that the dealer will be allowed to leave the auction premises with the vehicle. Some dealers will use third party transportation, like Ready Logistics or Central Dispatch to take vehicles back to their dealership lots.

Though each step of the floor plan process is spelled out above, the floor planning experience is extremely simple for dealers purchasing inventory. Do you have questions about how floor planning can benefit your dealership’s business plans? Reach out to your local NextGear Capital representative to learn MORE.

3 Ways Dealers Can Reduce Turn Time and Protect Profits

How long does it take to get newly acquired vehicles on to your dealership lot and ready to be sold? After purchasing, transporting, reconditioning, and posting vehicle details online, it’s easy to see how it could take a while to get a vehicle back to your lot. Unfortunately, taking too long to put inventory on your lot and post it online could be putting your dealership’s profit margins at risk.

It typically takes the average dealer seven to 10 days to make a car customer-ready. However, some reports indicate that the top 20 percent of dealers are able to get cars on the front lines of their lots in fewer than four days. In addition to this, it takes nearly 13 days to merchandise the vehicle online, yet again the top-performing 20 percent of dealers find a way to merchandise within a four day window.

It costs money to keep a car on a dealership lot, even if it is just sitting in a parking space. Figuring out the dealership holding cost per unit per day is a useful metric that can help dealers keep their inventory balanced. Dealers that are interested can use our three floor plan finance formulas to figure out what individual unit holding costs per day are.

Improving efficiency and the speed to retail is one of the most important steps a dealer can take to protect a current and long-term profitability. The faster a dealer can get vehicles to their lot and posted online, the faster that dealer is likely to turn that inventory into profits. The faster a dealer has those profits in hand, the sooner that dealer can buy more vehicles.

In terms of floor planning, it can also be an advantage to speed up the amount of time it takes to get a vehicle ready for customers. Overall, a dealer will spend less purchasing inventory on a floor plan as opposed to cash, especially if a dealership experiences aged inventory. However, the faster a car sells off of a dealer’s lot the less they will spend on floor planning expenses.

Some simple tangible ways dealers can increase speed to market include the following suggestions:

Use tools and resources to buy right: What vehicles in your market are in demand? Are you getting these vehicles at a good price? Tools like vAuto Stockwave, value lookup and individual dealership statistics via Account Portal and the Manheim Market Report are great places to begin looking for details about quality inventory.

Adjust the current  dealership transportation model: It takes time to move a vehicle from point “A” to point “B.” In order to speed up the auction-to-lot process it’s crucial to evaluate how quickly your dealership can transport those vehicles. How efficient is your dealership’s current transportation? Manheim customers can look at solutions such as Ready Logistics to transport dealership cars quickly and efficiently. In addition, NextGear Capital customers have the extra ability to floor plan any transportation costs.

Get vehicles online sooner: In an ideal world, dealers would get vehicles listed for their dealership before leaving the auction. Though that isn’t always possible, aim to have every vehicle online within 24 hours of arriving at the dealership. The sooner the vehicles are online, the sooner potential customers can see the type of inventory available on your lot.

Dealers who take steps to speed up the amount of time it takes to get vehicles from the auction to their lot have increased their chances of turning inventory quickly and growing dealership profitability.

For more information on the benefits of expediting the process from acquisition to retail, click here.

The Do’s & Don’ts of Auto Floor Planning

Chris Tingler using account portal on his mobile device

Dealer Manages his Auto Floor Planning

When dealers use a floor plan, they don’t have to use dealership savings to purchase inventory. This means dealers have a lot more flexibility available when it comes to using their cash. However, auto floor planning comes with its own set of management responsibilities. When it comes to managing a floor plan, dealers should be aware of a number of general “do’s” and “don’ts.”

Do Manage Cash Flow Properly
Floor plans help dealers to manage their cash flow by providing a line of credit for dealers to purchase inventory. With a dealer finance plan in place, dealers don’t need to use their cash on hand to purchase extra inventory. That cash then can go towards other expenses, such as advertising or overhead. Many dealers find success and profit when they manage their cash flow properly and floor plan responsibly by spacing out inventory purchases.

Don’t Floor Plan Irresponsibly
Mistakes happen when dealers use their floor plan irresponsibly. Just because a dealer is cleared to use a $250,000 line of credit, doesn’t mean that a dealer should use that entire line of credit on one day. In addition, if a dealer purchases more inventory than what they can reasonably sell, they’ve put themselves at risk to not be able to make floor plan payments, especially if they use their entire line of credit.

Do Maintain Communication With Floor Plan Financing Company
Not able to make a payment on time with your auto floor planning company? If so, dealers should get in touch with their floor plan financing company. If a dealer is proactive and honest, their floor plan provider will be more likely to work with them to resolve any issues or problems that they may encounter.

Don’t “Ghost”
A floor plan company will always want to know about the health of a dealer’s business. Not communicating potential issues to your floor plan provider can make it harder to remedy potentially preventable issues.

Do Understand Dealer Warning Signs
Dealer floor planning providers keep a close eye on certain signals that can indicate that a dealer might be struggling. The three main signals floor plan providers watch for are the following: collateral audits, insufficient funds (or NSFs), and inventory turn times.

Floor plan finance companies conduct collateral audits to ensure that they can verify inventory. Floor plan auditors will typically conduct an audit based on a time frame determined in a dealer’s contracted terms. If a floor plan company can’t verify a dealer’s inventory, it can be seen as a red flag. Dealers should let their floor plan provider know if inventory needs to be moved from a lot to another location for repairs or for a sale– just to make sure that auditors can verify that information.

Insufficient funds or NSF’s is an indication that dealers can’t make their payments on time, and can be seen as red flag. This is one of the biggest signs that there is an issue with a dealer’s account management, and it affects how the floor plan provider views their chances of being repaid.

Floor plan financing companies also keep a careful watch on average inventory turn times. Holding on to a vehicle for an extended period of time, or aged inventory, is a drain on cash flow and dealer resources. An increase in aged inventory means that is a bit more difficult for a dealer to earn back the initial vehicle investment, which in turn can make it harder to pay a floor plan financing company back because aged inventory compresses profit margins.

Dealers who are aware of these “do’s” and “don’ts” can ensure their auto floor plan is managed properly, and in turn will likely have a pleasant auto floor planning experience in addition to better profits. Have additional questions on floor plan management? Reach out to your local NextGear Capital representative to learn MORE.

Dealing With an Inventory Surplus

An Inventory Surplus on a Car Lot

It’s not uncommon for dealers to make buying decisions that can lead to an overstocked lot or an inventory surplus. Though this might seem like a good problem to have, an inventory surplus can lead to too much aged inventory and constricted cash flow. What are some actions dealers can take to rebalance their lots?

Reevaluate Purchasing Decisions
An inventory surplus can begin with a dealer’s purchasing decisions. Stocking the right inventory depends on a dealer’s ability to judge what type of inventory is best for their particular market. What types of vehicles are potential customers looking for? What type of inventory are customers researching online before they do an in-person dealership visit? If there’s a mismatch between the type of inventory being bought and the type of inventory that sells, a dealer would be wise to adjust their buying strategy.

Create an Aged Inventory Exit Strategy
Keeping aged inventory can tie up dealership cash flow. In order to free up cash flow and ensure vehicle sales, it’s important to create an aged inventory exit strategy. Every inventory exit strategy will differ from dealer to dealer. However, to start it would be wise to consider your strategy for different inventory age points, individual unit breakeven points, and places to get rid of aged inventory. For example, one dealer’s rule -of-thumb could be that when a unit hits the 30-day mark the vehicle price is routinely lowered until it is sold. This helps to maintain web and foot traffic, and in addition helps to keep the inventory on the lot fresh.

Sell Extra Inventory
Keep note of different places to dispose of aged inventory. Don’t just let inventory depreciate on dealership lots. Units that sit and don’t sell take up space and limits room for units that will drive profits.

Instead, sell those aged inventory units at auction. Some dealers will put off this decision in the hopes of avoiding a perceived loss. However, sometimes taking a small loss at auction is often better than leaving a depreciating vehicle on the lot.

Finally, dealerships need to invest more time and effort into building their local dealer network. This network can help to move around inventory to keep dealership lots fresh and interesting to buyers. It also helps ensure that space isn’t being taken up by the wrong vehicles.

Avoiding inventory surplus means dealerships have a balance of inventory and cash flow, fewer aged vehicles and less money tied up in the wrong cars. Making the decision to let go of extra units and aged inventory is a key step to take to ensure profitability of any dealership.

Buying Car Dealership Inventory: Two Questions To Consider

Car Dealership Inventory Sitting on the Lot

A successful dealer is someone that can simply turn inventory into profit. However, ensuring that a dealer can remain successful depends on the answers to the two questions: how much car dealership inventory should a dealer stock, and how many sales should a dealer be making per month based on the units they have in stock?

How many units should a dealer have on the lot?
In order to determine how much car dealership inventory a dealer should have on hand, it would be good to have an idea of realistic monthly sales goals, and an anticipated turn time for units. Let’s say a dealer wants to sell 30 vehicles per month, and their average turn time is 60 days. A 60 day turn time means a dealer turns their lot 6 times over the course of the year. Using these numbers, a dealer should be able to figure out the best number of units they should stock based on their goals. Take the number of monthly desired sales and divide it by the lot turn time. Then, multiply that number by the number of months in the year.

Monthly Desired Sales    30
Total Yearly Lot Turn (Assuming a 60 day average turn time)    ÷ 6
Months in the Year    X 12
Optimal Inventory Stocking Number    = 60 Units

Using this formula, this dealer would need to stock 60 units based on a desired sales goal of 30 vehicles per month and a 60 day turn time.

Based on current numbers, how many sales should a dealer be making?
Current sales numbers in conjunction with current car dealership inventory can help to determine of if current sales goals indicate realistic benchmarks. Let’s say a dealer currently has 70 units in stock. Based on that number, how many sales should this dealer be making per month? Multiply the current number of units in stock by the average inventory turn time. Then, divide that sum by 12, the number of months in the year.

Units in Stock    70
Total Yearly Lot Turn (Assuming a 60 day average turn time)    x 6
Months in the Year    ÷12
Optimal Number of Sales Per Month    = 35 Units

In this scenario, this dealer should have the goal of 35 sales per month based on the current number of units in stock and average turn time.

Though these numbers might fluctuate for individual dealers, in the long term, knowing the answers to these two questions will help dealers ensure they have the right balance of cash flow and inventory each month.

The Flexibility of a Car Dealership Floor Plan

Dealer looks up Car Dealership Floor Plan on his phoneDealers thrive in a flexible, fast-paced environment, and dealership capital needs to be flexible as well. Though some dealers might think buying vehicles with cash is the most flexible option for investing in inventory, there are some key benefits that a car dealership floor plan offers that auto dealers should consider.

Floor plans free up dealership cash
Every dealership needs cash on hand for various expenses. For the most part, there’s a set amount of money a dealer has on hand at a time. In addition to paying for inventory, dealers use this cash to pay for employee salaries, facility maintenance, marketing and advertising and in addition to a number of other operating expenses.

Dealers that have a floor plan don’t have to use their cash to purchase inventory. The cash that would originally used to purchase inventory can now be put towards other expenses. This means dealers can focus those monetary resources on expanding and improving other parts of the business. For some dealers, this means hiring more help. For others, it can mean opening up a brand new location.

Dealers don’t have to convert inventory to cash
Using a car dealership floor plan ensures that a dealer can have extra capital on hand when it is needed. If a dealer only uses cash to purchase inventory, a dealer can only get that cash back if they sell the vehicle, either to a consumer or through other channels such as an auction. Selling a vehicle to a consumer for extra cash takes time, and sometimes dealership expenses can’t wait. In addition, there are extra fees often associated with selling a vehicle at an auction. A sell fee on a $20,000 vehicle within the first 60 days can easily be on par with a floor planning fee. Is it really worth the hassle of converting inventory to cash at auction every time your dealership needs extra money?

In addition, any inventory acquired that doesn’t sell will eventually lose value. If a dealer purchases inventory with cash, that means their cash also loses value. If a dealer wants to convert inventory to cash, it is highly likely that the value of that inventory, and in turn, the amount of cash a dealer can get back from the vehicle will be less than expected.

With a floor plan, if a vehicle hasn’t sold after a contractually determined number of days a dealer only has to pay for a small portion of the car’s value. Once the car sells, the dealer pays back the amount they initially bought the vehicle for.

Dealers require flexibility from their capital. Though it might seem more flexible to purchase inventory with cash, the dealers that use floor plans will often increase their purchasing power and improve the flexibility of their working capital.

The Mentality Needed When Purchasing Dealership Inventory

Dealer Uses iPad to Manage Dealership InventoryPurchasing dealership inventory with profit potential begins with a dealer’s daily choice to have a mentality of discipline and balance. Though selling cars is a primary focus for a dealer, a secondary focus hinges on a dealer’s ability to know when it’s time to buy more vehicles, to know what type of vehicles to buy, and to know when it is time to get rid of inventory that hasn’t sold. So where do you begin to create a culture of discipline and balance for your dealership?

Balance
Part of establishing dealership balance is determining realistic monthly stocking and sales goals. How many units can you sell in a month? How much inventory should your dealership stock? We recommend using three floor plan finance formulas to determine appropriate stocking and sales numbers. With those calculations as a starting point, your dealership should be able to get into a rhythm of adjusting stocking and sales goals based on results and current dealership conditions.

Discipline
Maintaining discipline year-round is crucial to dealership success. It would be easy to let dealership inventory sit on your lot until each vehicle has found a buyer. However, that isn’t always the most efficient use of dealership capital or lot space. Making and enforcing dealership inventory guidelines are an effective way to maintain discipline for the cars on your lot.

For example, your dealership could set a guideline for how much your dealership is willing to spend to repair and recondition a vehicle. When at auction, estimate potential repair and reconditioning costs. If a particular vehicle is on the edge of those costs, what factors determine if your dealership is willing to take a chance on that vehicle?

Another way to maintain discipline for your dealership could be addressing aged inventory. Does your dealership have an established exit strategy for aging inventory? If so, is that strategy consistently followed? Establishing a strategy for vehicles at 15, 30, 45 and 60 day intervals gives your dealership a good idea of what to do at any point in a vehicle’s lifecycle.

Of course, your dealership guidelines aren’t necessarily rules that are set in stone. There may be circumstances where your dealership will need to deviate from normal procedure. However, the specific circumstances and potential return on investment will determine if it’s a good idea to depart from normal guidelines

Though the choice to constantly maintain dealership balance and discipline isn’t easy, dealership success and profitability will show that it is often the best decision a dealer can make.

Make Wise Vehicle Investments With a Floor Plan Line of Credit

Dealer on Car Lot Using iPad to Manage Floor Plan Line of CreditIt is often said that used car dealers will typically make most of their profit margins with an initial vehicle purchase. In addition, almost all dealers are equally affected by margin compression and aged inventory which can cut into dealership revenue. This pressure on profits means it is even more important for dealers to make sure they use their floor plan line of credit to make wise inventory investments. How can an automotive dealer ensure they purchase vehicles with good potential profit margins?

Know What Sells
Not every dealership can meet the needs for all potential customers. A dealer looking to sell specialized high end brands is not likely to stock units valued under $5000 for sale. What is your dealership’s niche? What types of vehicles products and color combinations tend to sell best on your dealership’s lot? Are there any price points that seem to sell better than others in the market? For NextGear Capital dealers, use some of the analytics tools and reports available on myNextGear and look for any dealership patterns or trends.

Mind Dealership Needs and Budget When Purchasing
What type of vehicles do you need to restock your dealership lot? How much of your floor plan line of credit are you willing to spend to acquire a particular vehicle? What does potential retail mark-up look like? Walk the lot before an auction sale to figure out what inventory would fit at your dealership. Check vehicle values using the Manheim Market Report (MMR) and by using Value Lookup on myNextGear. Set limits on how much you are willing to spend for a particular vehicle, and be aware of how much of your floor plan you would like to use on sale day. Using your entire floor plan line of credit all at once will allow you to stock a lot of inventory, but keep in mind that you must have cash readily available to pay off the initial floor plan investment if those vehicles haven’t sold.

Weigh Reconditioning Costs
Before being sold on a used car dealer lot, some vehicles might need some repairs and will need to be cleaned. If a dealer has the chance to look at any available auction inventory details and walk the lot before the auction sale, it might be possible to gauge some of the reconditioning costs for a particular vehicle. Each dealer will have to decide on type and amount of reconditioning risk they are willing to take on. Evaluating units that need reconditioning and the potential cost of repairs before purchasing can give dealers a better idea of the profit margins they can make on a particular vehicle.

Dale Pollak from vAuto typically recommends dealers to strive for an average cost to market ratio of 84 percent for used vehicles. This ratio allows for a 16 percent difference between the cost to own and recondition a vehicle and its current retail asking price.

Purchasing inventory with good potential profit margins is a constant balance of knowing your dealership, keeping track of your floor plan, and knowing what vehicles have profit potential. Though this process might take some time to implement, it’s never a bad idea giving your dealership more chances to profit.

How Does Floor Plan Financing Work?

The terms “floor planning” and “floor plan financing” get thrown around pretty frequently in dealership and auction circles. But what do these terms really mean and how does floor plan financing work?

To put it in the simplest terms, floor planning and floor plan financing work almost like a credit card made solely for purchasing vehicle inventory.

Credit cards are issued by a bank to an individual. Individuals can then buy personal goods with the money loaned from the bank. The money borrowed from the bank collects interest, and one has the choice to either make a minimum payment or pay off the balance in full when the bill is due.

So how does floor plan financing work?
Much like a credit card, a floor plan financing company extends a line of credit to a car dealer. Dealers can then use their floor plan line of credit to purchase inventory from auctions and other inventory sources. If a dealer purchases a car on a floor plan, takes it back to their lot and it doesn’t sell within a contractually determined number of days, dealers are charged a small fee. As a dealer sells their inventory, they pay back the original loan.

With a floor plan, the initial investment needed to buy a particular unit is a fraction of the vehicle’s actual purchase price. As soon as that vehicle sells to a consumer, floor planning dealers have the ability to immediately realize profits, pay back the initial value of the loan plus interest and fees, and had the flexibility to keep their funds working for their dealership.

How does floor plan financing work specifically to benefit auto dealers?
Floor plan finance companies are uniquely attuned to the needs of auto dealers. Using cash or a bank line of credit to purchase inventory can work for some car dealers, but many floor plan financing companies offer a variety of dealer-specific benefits. In addition to freeing up the cash a dealer has on hand, other floor plan financing benefits can include extra flexibility in terms of paying off a particular piece of inventory, payment extensions and credit increases if necessary. Other services are also frequently offered which can include records management, title services depending on the dealer’s state, collateral protection and state-of-the-art online and mobile account management tools.

Though floor plan financing can seem like a confusing concept, in practice it can be an extremely beneficial business strategy for automotive dealers.

Want to learn more about floor plan financing? Contact us and we’ll walk you through how you can do MORE as a NextGear Capital dealer.

Managing Car Dealer Advertising Posts

A search engine bar with magnifying glass that signifies car dealer advertisingA key component of car dealer advertising is the information dealers make available online. What dealers present on their websites and digital advertising to potential customers can directly impact future customer interactions. If a car buyer can’t see any pictures or read any details about a vehicle’s history, they’ll likely move on. To avoid that outcome, dealerships must put care and consideration into their digital advertising posts.

Generating Leads and Exposure
Placing listings on sites like Kelley Blue Book, Autotrader or even doing a campaign with Dealer.com are some of the most popular ways to generate leads. In this form of car dealer advertising, it’s important to view posts as more than just lead generators. They can also create great exposure if executed properly.

Creating Posts That Achieve Results
To get people in the door for dealership visits, it’s important to create posts that resonate. Good car dealer advertising posts focus on the following areas:

  • Exceptional Photos: Photos are the first impression a buyer has of a vehicle. Not only do these pictures need to be clear and of good quality, but they need to show detail. Customers expect to see every inch of the car in these photos, and are looking to see everything from the tires to the space behind the driver’s seat. They don’t bother with dealership visits until they are confident in the merchandise.
  • Quality Content: Every used vehicle has a backstory. Car buyers want, and need, to have information about the vehicle’s history. Don’t leave out the details. What’s the current mileage? Has all maintenance been documented? What special features are available? Did the previous owner smoke? Providing details tells the story of the vehicle, and shows transparency to potential customers.
  • Accessible Contact Information: Let’s say a customer liked the photos and the description on a particular posting, and now wants to take a look at the vehicle in person. Dealers help to facilitate an easy buying process by making dealership contact information easily accessible. Including multiple contact methods will also increase chances of Without accessible dealership contact information, customers will move on.

When these ads turn into in-person visits, dealerships will need to confirm where the lead came from. Be sure to coach front-line team members to ask customers,“Where did you hear about us?”

Car dealer advertising is only as effective as the effort put into the photos and descriptions of each post. Without captivating photos and a detailed description, buyers might pass on their next vehicle. To turn that search for a vehicle into a buy, or at least a visit to the lot, dealers need to spend a few extra minutes on their posts. This can pay off quickly and creates long-term relationships with buyers who trust their dealerships.