
Floor Planning
Floor planning is a form of retailer financing for large ticket items displayed on showroom floors or lots. Floor planning is a flexible way to finance inventory for a dealership, but in the cyclical industry of automobiles, it must be managed responsibly so that the financing cost burden does not exceed the dealership's capacity to repay. Retailers use a short-term loan to purchase inventory items, and the loan is repaid as inventory is sold. In general, inventory financing is an asset-backed, revolving line of credit or short-term loan made to a company so it can purchase products for sale. If a new car dealership wishes to purchase 100 of the latest Lexus SUVs, it can take out a loan to buy the cars and, as the dealership sells them to its customers, repay the lender principal and interest.

What Is Floor Planning?
Floor planning is a form of retailer financing for large ticket items displayed on showroom floors or lots. Specialty lenders, traditional banks, and finance arms of manufacturers provide the short-term loans to retailers to purchase items and they are then repaid as the items are sold.
Automobile dealerships utilize floor plan financing to run their new and used car businesses. Floor planning is a type of inventory financing.



Floor Planning Explained
Floor planning is offered by many types of lenders, big and small. Specialty finance companies fill an important role in providing credit for dealerships to purchase inventory. For example, dealerships for trucks, recreational vehicles, and boats, as well as home appliance retailers will turn to floor plan loans to purchase inventory.
In general, inventory financing is an asset-backed, revolving line of credit or short-term loan made to a company so it can purchase products for sale. Those products, or its inventory, serve as collateral for the loan if the business does not sell its products and cannot repay the loan. Inventory financing is especially useful for businesses that must pay their suppliers in a shorter period than it takes them to sell their inventory to customers. It also provides a solution to seasonal fluctuations in cash flows and can help a business achieve a higher sales volume - for example, by allowing a business to acquire extra inventory to sell during the holiday season.
Floor Planning in Auto Sales
Despite some consolidation in the car industry, the auto dealership industry is fragmented among thousands of independent dealerships, many of which have unique needs. Specialty financiers customize floor planning terms to suit the needs of these customers. If a new car dealership wishes to purchase 100 of the latest Lexus SUVs, it can take out a loan to buy the cars and, as the dealership sells them to its customers, repay the lender principal and interest. The loans are always collateralized by the purchased inventory, and in certain cases, by the building or property of the dealership.
Because of the fragmented nature of these dealerships, which suppresses economies of scale, financing expense tends to be higher than for a large corporate entity. Floor planning is a flexible way to finance inventory for a dealership, but in the cyclical industry of automobiles, it must be managed responsibly so that the financing cost burden does not exceed the dealership's capacity to repay.
Related terms:
Big-Ticket Item
A big-ticket item is a high-priced item, such as a house or car. In the context of retail stores, they may also refer to products with selling prices and profit margins that are significantly higher than those of other items in the stores. read more
Blue Book
The Blue Book or Kelley Blue Book lists new and used car prices, helping car buyers determine the fair market value and trade-in value of automobiles. read more
Capitalized Cost Reduction
Capitalized cost reduction is any upfront payment that reduces the cost of financing. Capitalized cost reduction is generally associated with the purchase of a home or automobile. read more
Cash Flow
Cash flow is the net amount of cash and cash equivalents being transferred into and out of a business. read more
Closed-End Lease
A closed-end lease is a type of rental agreement that does not require the lessee to purchase the asset at the end of the lease. read more
Dealer Financing
Dealer financing refers to loans originated by a retailer that are sold to a bank or other third-party institutions. read more
Economies of Scale
Economies of scale are cost advantages reaped by companies when production becomes efficient. read more
Financing
Financing is the process of providing funds for business activities, making purchases, or investing. read more
What Are the 5 C's of Credit?
The five C's of credit (character, capacity, capital, collateral, and conditions) is a system used by lenders to gauge borrowers' creditworthiness. read more
Floor Planning
Floor planning is a form of financing for large ticket items displayed on showroom floors. For example, automobile dealerships utilize floor plan financing to run their businesses. read more