Benefits of Floor Plan Lending

Ever wonder how an auto dealership out on the Miracle Mile can afford to keep row upon row of new and used cars on its lot? Or how about a coastal marine dealer with its yard chock-full of pleasure boats, from eight-foot tenders to day sailors to 75-foot luxury yachts? It’s pretty capital-intensive to own all that inventory. But it also depends on whose capital is being used.

One of the most common forms of financing such large-scale, high-cost inventories is a technique known as “floor planning.” Simply put, this is a type of short-term bank loan that is used to help retailers purchase big-ticket inventories such as new and used cars, trucks, boats, manufactured homes, and recreational vehicles. The loans allow dealers to borrow against their inventory and repay the debt as they sell off that inventory. The loan facilities are essentially lines of credit that also let the dealer restock their lots. The floor plan lender is secured on each cash advance by a specific unit of inventory. 

For Mike and Lucy Deveney, owners of Midway Automotive, a large used-car dealership on the South Shore, floor planning is what helps them keep their lot stocked with a full complement of new-to-you vehicles.

“We typically have 200 to 230 used vehicles on the lot these days,” said Mike Deveney. “We turn at least half of that inventory every month, and we buy new inventory just as fast as we sell what’s on the lot.”

Midway has been doing business on Route 123 in Abington since 1997. Its floor planning credit line has grown from about $500,000 in the early years to now around $4.5 million, and Deveney notes that it’s rare for the company at any time to have less than $4 million of that line committed to stocking his inventory.

During the height of the recreational boating season in the Northeast, Bosun’s Marine will often have as many as 90 boats on hand at its six locations along the Massachusetts seacoast, with sticker prices that range from a few thousand to hundreds of thousands of dollars. Tim Leedham, who founded Bosun’s as a small Cape Cod marine accessories shop in 1985, grew his business slowly over the years, adding boat sales and service to the business model and later opening new locations, including three on the Upper Cape and one each in Quincy, Charlestown, and Peabody. 

“What we’ve settled in on is a mix of inventory financing approaches,” said Leedham. “We use a certain amount of the company’s own capital to purchase inventory outright, but we also have a majority of our inventory in a floor plan facility, so that we have capital on hand for seasonal cash flow requirements or expansion opportunities.

“We like to have the stability and security of having cash on hand, but of also owning some of our stock as well. It’s a balance,” Leedham said.

How it works

Steve Ingalls, a vice president and 26-year veteran at Rockland Trust Company, is a floor plan bankerwho has worked with both Midway and Bosun’s. 

“Floor planning allows dealers to have the units delivered, put on their lot, and then pay the manufacturer for the shipment,” Ingalls explained. For example, when Ford or Toyota deliver new cars to one of their dealers, with a floor plan facility in place, the dealer is able to pay for the shipment using his floor planning line of credit. The new inventory serves as collateral for the loan, and the dealer will pay off the debt as individual units are sold. 

Some automobile manufacturers offer dealers their own version of floor plan finance. In industry parlance, this is known as “captive financing,” in which a manufacturer’s financing arm—Ford Motor Credit, for example—will finance the dealer’s new inventory. Terms of these “captive” facilities are similar in many ways to floor planning.

Typically in a floor plan facility, dealers will pay interest only on their inventory for a certain period of time. After that period has run, dealers would be responsible for paying both interest and principal on the loan. This is known as the “curtailment period,” and it runs for a specific period of time as well. Thereafter, if the unit of inventory still has not been sold, the lender may have the right to demand full payment. 

Clearly, there’s a built-in incentive for dealers to sell their inventory as quickly as possible. 

“The advantage for the dealer who turns his inventory quickly is minimal interest expense,” Ingalls explained.

Dealers of new inventory, be it cars or yachts, will typically have access to both floor planning and, particularly in the auto trade, captive finance. Dealers in used inventory typically don’t have access to captive financing and so must rely on floor planning. In both cases, the pricing of these lending facilities is pegged to a set rate of interest. In the case of new automobiles, for instance, the pricing tends to be tied to LIBOR or the London Interbank Offered Rate. For used vehicles, the common index is the Prime Rate. Final interest rates are often in the area of two to three percent above the indexes, depending on the borrower’s financial strength.

Key for customers is financial strength

Manny Silva, who has spent 35 years in the inventory finance field, recently joined Rockland Trust. Together with Ingalls, the two will cover all of New England and eastern New York, focusing mainly on used car and marine dealers.

“For us as a lender, the key is always a dealer’s liquidity and working capital,” said Silva. “We’re also looking for a dealer to display a solid net worth, a demonstrable track record, and accountant-prepared financial records. In the end, financial strength must be demonstrated. 

“The key to a good banking relationship is to know your customers—to understand their business models, their opportunities, and challenges, as well as help them find solutions and products that work,” he added.