7 Floor Planning Mistakes Dealers Should Avoid
Retail floor planning (aka floorplanning or inventory financing) is a line of credit that allows dealers to purchase automobiles using their retail inventory as collateral. It’s a common industry practice, but whether you’re a franchise or an independent automotive dealer, floor planning is stressful.
On paper, it’s simple, you take out a loan, bring in some new inventory, sell that inventory and pay off your credit. But any seasoned dealer knows that there are cracks you might never see coming. Fortunately, you can do something to protect your dealership from mistakes you can avoid. In this article, we’ll break down the 7 most common dealer floor planning mistakes and how to avoid them.
- Mishandling Your Cash Flow
- Over Estimating Yourself
- Poor Communication
- Insufficient Funding
- Collateral Audits
- Turn Times
Mishandling Your Cash Flow
Taking out credit is a common floor planning practice. Unfortunately, so is having multiple loans mature around the same time. Mishandling your cash flow can trap your dealership in a borrowing cycle that makes it extremely difficult to get out of debt and harms your relationship with creditors.
By planning your cash flow influx ahead of time, your dealership can avoid credit trappings. This will enable you to invest those funds in your dealership’s growth.
Over Estimating Yourself
With all of that credit to play with, it’s tempting to acquire as much inventory as you can. But, if you purchase vehicles you can’t sell, then you’re setting yourself up for missed payments. Not good.
No one is making you spend everything at once. Come to auction with a game plan and use your sales metrics to guide your purchases. One of the best ways to know what’s worth buying is by viewing Cross-Sell’s interactive marketing reports. These let you know what’s selling in your area and what type of inventory you should be buying.
Communication is oh so critical in this industry, even more so when it comes to floor planning. Make sure your floor plan provider is informed of any business updates, changes, or complications.
Don’t wait if you run into issues, especially with payment deadlines. In this case, it’s easier to ask for permission rather than forgiveness. By being upfront and honest with your floor plan provider, you’ll have a much easier time working with them and resolving issues.
According to Cox Automotive, having Insufficient funds (or NSFs) is one of the biggest mistakes you can make. Not only is missing a payment or having a check bounce embarrassing, but it’s a huge red flag for your floor plan provider.
Not only does this put your floor plan provider at risk, but it hurts your reputation with them and anyone else in their network. Do not find yourself in this position.
The last thing you need is the headache of explaining to your floor plan company where some missing inventory went. Sure, you know it was moved to another location, but if you can’t keep track of it to verify it, your lender won’t be happy.
It’s crucial that the collateral — the physical inventory — can be verified on at least a monthly basis. If anything is being moved, let your floor plan provider know ahead of time.
According to NetGear Capital, “The NIADA and NADA have done extensive studies that show used vehicles should be turned every 45 days.” This only makes sense, as your inventory devalues as it ages on your lot. At some point, you’re going to have to stop hunting for the perfect buyer and cut your losses at an auction.
Otherwise, your floor plan company is going to get cold feet if they see a vehicle taking an extended leave on your lot. Fortunately, the free space from a short turn loss is an opportunity to make a major profit off a fresh vehicle. VinMotion is a great tool for keeping track of your inventory’s value as it’s moving on and off your lot.
In the end, it all comes down to management and the best management is well informed. When opening an account with a floor plan provider, make sure expectations are clearly established.
Have payment dates, available resources, and contact information for auction representatives clearly defined. By incorporating these resources into your floor planning management, you’ll be more likely to avoid these mistakes.
Now it’s Your Turn
Floor planning can be tricky, but we’ve listed the mistakes you want to avoid at all costs. Do you think there’s anything we missed? Leave a comment letting us know any other floor planning mistakes dealers should look out for.