Floor Plan 101 - YouTube

Hello! I'm Thad Sykes, Divisional Vice President in NextGear Capital. Welcome

to financing inventory for growth - how to successfully manage a floorplan line of

credit. Today we will discuss what a floor plan is, how a floor plan works,

tips on lender compliance, and how to apply for a floor plan line of credit.

Let's get started! Floor planning is a term used to

describe the practice of inventory financing through a discretionary line

of credit issued by a bank, finance company, or private entity - in other words

a floor plan provides additional capital with which you may buy and stock

inventory to sell at your dealership. Traditional floor plans from floor plan

specific lenders typically have four pricing characteristics, the first one

you're going to learn about is Interest Rates. Each line of credit will usually have a

specified interest rate that is charged for the outstanding principal balance.

The type of interest calculation that is used can be different from lender to

lender. Next on the list is known as a Term. These lines will require payments

to be made towards the outstanding balance at certain maturity points; much

like a traditional consumer car payment your floor plan will require that the

loan balance be reduced over a period of time. The time between the flooring of a

unit and the due date is commonly referred to as Term. Most lenders will

allow some flexibility in choosing what length of time is available to you

between terms. After Term we move on to the Floor Plan Fee. Traditional floor

plan lenders will charge a transactional fee for each advance made against a

piece of inventory. This fee is referred to as a floor plan fee. The amount of that

fee can vary from lender to lender and is normally based on the lender's

standard practices, the amount of risk they believe they are taking by

extending the line of credit, and the length

time offered in the term. And finally we have Curtailment. At the end of each term

a payment is due to the lender. This payment is called a curtailment. In

addition to having some flexibility in the length of time offered in each term

some lenders allow options as to how much in the principal balance of a unit

is required to be paid down at the end of each term. It is good practice to

choose a percentage based on the capital position of your dealership and the

price range of the inventory you plan to stock using the line. One important

thing to remember: floor plans do not provide the same length of time as a

consumer loan before a loan payoff is due. Most floor plans provide for 90 to

180 days before a full payoff is due for any given unit. Now, allow me to share

with you how a floor plan works. A floor plan transaction is really easy to

follow - it mirrors the flow of any other inventory purchase you would normally

make for your dealership. Most floor plan lenders will allow for inventory

purchases from multiple types of seller, this seller could be an auction, another

independent dealer, a wholesaler, or franchise store. This purchase could even

be from a consumer in the form of a direct purchase or a trade in. Now, following

your acquisition of the inventory, the deal is submitted to the floor plan

lender for flooring. If the unit is purchased at auction, the auction will

typically have an online interface they use to check your availability or how

much room you have on your line of credit. Auction houses will want to be

sure you have sufficient room on your line of credit to fit the purchase

amount of the inventory. If you purchase from another dealer, you

or the selling dealer will submit to the lender for flooring. In these instances

the lender will review the unit being purchased to ensure that the unit's value

matches the amount you're requesting. Provided the lender approves the funding

or advance, the amount is then dispersed either by ACH or check to your

dealership or the seller. During the transaction the seller is responsible

for sending the title to the lender. Bear in mind that most lenders hold

titles in house for collateralization until the unit has been paid in full.

Once the payoff is remade, your available balance is increased with the reduced

loan balance and you're ready to floor another unit. A floor plan can be set up to

house multiple loans according to your business needs. A typical floor plan can

handle multiple flooring transactions in various stages of their life cycle -

whether it be flooring or paying off at any given time.

It's great to see you again! Now that I know you understand the basics, it's time

to dive in the floor plan compliance. Each floor plan lender will require that your

dealership sign a Promissory Note, often referred to as your contract. Your contract

will identify specific compliance requirements for your dealership. To keep

your floor plan line open and ready to handle your transactions you'll want to

be sure your dealership remains compliant. Here are a few things to pay

close attention to: first, your dealer's license must remain current - allowing

your license to expire will usually cause you to be non-compliant with your

lender. Next, you must pay your lender promptly when a car is sold or disposed.

Most often lenders view the time the unit leaves the lot with, no intention of

coming back, as the sale date or disposition date. Each lender will

identify a specific time line after the sale when you'll need to pay for the

unit in full. Not paying a unit off when you sell it can certainly cause issues

with your line of credit; and can affect the decisions that the lender makes as

your line of credit needs to grow. Not paying a unit off when you sell it can

certainly cause issues with your line of credit and can affect decisions that

your lender makes as your credit line needs to evolve. Remember the curtailment

payments we talked about earlier, those need to be made on time. Most lenders

will provide you with some type of online access - from managing your payment

due dates and making those payments. Some lenders now offer mobile applications

that will allow you to do the same thing while you're on the go. Not paying your

curtailment payments will certainly make you non-compliant with your lender. It's

good practice to communicate with your lender if cash flow problems arise and

you believe you're going to have a legitimate reason to be late. Communicating

with the lender can help you remain compliant even when you're avoiding

late with your curtailment payment. Also of note is that most floor plan lenders will

require that you allow them to visit your lot at regular intervals to inspect

your inventory. This is called an Audit. This lets the lender confirm that the

collateral for the line of credit still exists. They'll want to see that the

inventory is in sellable condition and is on your lot for sale. Due to the

nature of selling used cars, most floor plan providers know that some inventory

will be in stages of reconditioning. They know that you will need to send cars out

for bodywork, oil changes, and tire. It's good practice to always know where your

floor plan inventory is located and to have addresses and names of any shops

handy when the auditor asks for it. Keeping your audits compliant and smooth

for the lender is always a good way to show your lender your dealership's

operation is well organized. Now, normally floor plan lenders will run a portion of

your inventory insured against physical damage. This is definitely an area that

serves to protect both your dealership and the lender, in the event you

experience an unforeseen loss due to damage of your inventory. Many lenders

will supply you with their own insurance policy if you don't have one.

A way you can save money is by using your own insurance agent to purchase the

policy. It is always a good idea to compare these costs and make the best

decision for your dealership. Ok, here's one last tip on compliance, your floor

plan lender will likely monitor your dealership credit and personal credit to

be sure you don't have any new negative credit showing up during your

relationship. From time to time they may also search for liens or judgments, for

this reason it's important to stay current on all of your financial

obligations - in order to remain compliant with your lender. If something unexpected

pops up be sure to communicate with your lender so that they can give you the

best advice to minimize any disruptions in your ability to use your line of credit.

Now that we've talked about how a floor plan works and the keys to floor plan

compliance, you've probably started to get an idea about whether having a floor

plan makes sense for your dealership. There's some pieces to think about when

you begin to look for or apply for a floor plan. At the top of the list should

be how much of a line of credit you need. This is a serious question.

After all, too much and you may over leverage your capital; but too little and

it may not support your inventory needs. A good rule of thumb is to start with

supply you want to stock for specific length of time. Whether you want to stock

a 30 day supply, a 45 day supply, or 60 day supply - there is a simple formula to

decide how much capital you need. For a great starting point to determine your

needs, multiply the number of units you would sell during that time period by

your average wholesale cost. For example, let's say you typically stock a 45 day

supply of units that average $5,000 wholesale and you sell on average 20

units a month. Multiply 20 units per month by $5,000 this tells you you're

need is $100,000. Now, you may be wondering, where can you use the line of credit?

It's important to know if the lender you decide to use is an accepted payment

method at the purchasing venue that you most often use. Some regional lenders are

accepted locally. If you purchase from online auctions or auctions in another

part of the country, you'll want to be sure your lender is also accepted there.

If you most often acquire your inventory through trade-ins or purchases from

other dealers, you'll want to ensure that your lender can handle those types of

transactions. The next question I get asked is, can

your interest rate, terms, and fees be customized? I mentioned earlier that

terms, fees, and curtailment should match your business model and available

capital. While some lenders have set programs, others will allow you to

customize a plan just for your dealership. It's good practice to know and

understand what your expected sales margins will be, so you can figure out

how much floor plan expense you can absorb in each unit. Knowing this will

help you determine what you're willing to pay and what's a request from your

lender. You will have to recognize that the lending business is very much about

risk versus reward in the eyes of the lender. For example, if you're a brand-new

business with limited capital, you can expect to pay a little bit more to

balance the risk versus reward for the lender. Yet another question I hear is

this: Do lenders offer local representation? If you're the type of

person that prefers someone you can get to know during your relationship with

the lender, it will be important for you to know what they offer in terms of

dealer representation. Some lenders provide brick and mortar locations with

local representatives, while some offer centralized servicing and local reps

that travel to your dealership. Whichever you prefer, it's important to communicate

your needs with the lender. All of this ties into the overall viability of your

operation. A thriving business should be building equity while reducing debt. A

thriving dealer principle should be building net worth, not acquiring debt to

keep their business above water. If your business isn't building and growing, then

you probably shouldn't be seeking more floor plan dollars. More flooring won't

turn around a failing business model. You would just be adding more fuel to the

fire. Instead, focus on perfecting your operation. However, if your business is

building equity and turning a profit, having

some additional buying power can certainly help you shift into the next gear.