An Introduction to Floor Plan Financing

Floor Plan financing or “floor planning” is a type of financing that is used to finance dealer inventory.  In typical floor plan financing, a distributor or dealer borrows funds to purchase inventory from a manufacturer.  In many cases, floor plan financing is arranged with the financial assistance of a manufacturer’s “captive lender” or the manufacturer itself.   Loan repayment arrangements under a floor plan loan facility terms are often linked to a “pay as sold agreement” or according to a specific schedule.

Floor plan financing is a specialized form of inventory finance.  It is different from more traditional asset-based lending revolving lines of credit in that floor plan financing…

  • involves three parties to the loan, rather than the more common two-way relationship with just lender and borrower.  Floor plan financing is always a three-way relationship with a distributor, manufacturer, and lender all coordinating the transaction.
  • is most often specifically used to finance “floor” inventory or display inventory.
  • involves methods of inventory control by the lender which are very strict, often featuring bi-weekly or monthly audits.

Floor Plan Financing vs. Traditional Asset-Based LendingFloor Plan Financing

Floor plan finance providers typically approach the financing of inventory much differently than a traditional asset-based lender, due to the fact that most floor plan financing agreements contain a recourse provision.   Under such a recourse provision,  the manufacturer agrees to re-purchase any inventory that is not sold as a result of a default by the distributor.  Such an additional recourse guarantee often allows floor plan finance companies to advance up to 100% of the inventory’s cost.

Modern floor plan loan facilities fall into two distinct types.  These are:

  • Traditional Floor Planning…where a loan amount is linked to titled goods and a specific piece of inventory.  Traditional floor plan facilities are often provided to dealers in the automobiles, boats, heavy equipment, manufactured housing, recreational vehicles, etc.  They features a pay-as-sold repayment plan.
  • Consumer Goods Floor Planning…which involves non-titled goods such as electronics, appliances, computers, furniture, etc  and features a loan repayment formula more similar to traditional asset-based lending.  Loan repayment provisions using this method are more likely to be on a “scheduled pay” basis rather than on a “pay as sold” basis.  The dealer will likely be  required to pay using a formula such as 1/2 due in 30 days and the balance due on sixty days from the time of purchase.

Regardless of the loan structure however, floor plan financing will always involve three parties as opposed to just two for asset-based lending.  These are….

  • the dealer
  • the lender
  • the manufacturer

Much like a standard asset-based loan arrangements, field examinations will be conducted on a regular basis to insure the integrity of the lender’s collateral.  In addition to conducting an inventory count, exams will monitor such things as inventory turnover and profit margins on the inventory, constantly assessing the risk to the lender should the borrower default.

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