Posted on June 23, 2021 by Travis Peterson
Floor planning and dealership inventory is not a new topic; but it’s gotten a lot more interesting lately. As Auto News reported in a recent article, floorplan swung from a $96-per-vehicle-expense on average in 2019 to a $140-per-vehicle gain last year. The gains are attributed to slim vehicle inventories, low interest rates, and credits from OEMs.
Unfortunately, this is probably a one-time thing. OEM subsidies have died down, and gains made from new vehicle floorplans are going to be offset by high used vehicle floorplans.
We’re also likely looking at a permanent change in our industry when it comes to dealership inventory. Many experts predict we’ll never go back to high, high levels of inventory and slower turn. I believe this is a good development for our industry. Excess inventory is a waste and accrues unnecessary interest expense.
With so many factors in flux, a hard look at your floor planning is in order. Get started with these proactive tips:
- Audit your floor planning – Audit your floor plan lenders and interest rates. Record-low interest rates mean now is the time to renegotiate. Research what various financial institutions are offering and compare against your current lender. You may be able to get a better deal.
- Beware of overleveraging on used cars – Sky-high demand for used vehicles has many dealers paying up to 120 percent of market value. That’s not a problem if you can turn those vehicles quickly for a profit. But beware of changing market conditions and buying the wrong vehicles. The market will correct as OEMs push out more new vehicles. Floor planning an expensive used vehicle that sits on your lot may result in a debt burden that wipes out any profit. Ensure you’re only buying your core used vehicles – those that turn quickly for higher than average profit – and be ready to re-price quickly if the market changes so you don’t take a loss at auction.
- Monitor your curtailment period – It’s likely you pay interest-only on your inventory for a certain amount of time. After that, your curtailment period kicks in and you’re paying both interest and principal on the loan. Your curtailment period also runs for a certain amount of time. If that time runs out and the unit is still sitting on your lot, the lender has the right to demand full payment. It’s crucial to stay on top of these timelines. Miss a deadline and your costs can go up precipitously. This may not be a big concern at the moment but it will be when the bubble bursts.
- Stay in trust with your vehicles – Selling out of trust can be a criminal offense, leave you vulnerable to civil litigation, and even cause you to lose your dealer license. Dealership groups that divert money away from paying loans and toward other business expenses may have grown too quickly or had poor cash management strategies. If you’re facing a cash crunch, one of the worst things you can do is let a few vehicle sales go out of trust and expect to make it up the next week. Experts know how quickly that can snowball. If you’re struggling, reach out to your lender first and see if they will work with you. Most will help guide you through difficult times. Going out of trust can also happen under the radar. An Auto News article reported on a dealer who went out of trust because his business manager quit and the replacement, new to the industry, thought it was okay to prepay trades and let the flooring loan float for a few days.
- Research floor planning solutions – As a former Controller, I know how time-consuming managing floor planning can be. Excel simply isn’t up to the job. Take the time to research floor planning solutions that manage your data, and also help audit to ensure your balances match up. Nobody is perfect and a small discrepancy can become a big problem.
Our industry will always rely on floor plan lending to keep new and used cars on the ground. The uncertainties of today’s market present opportunities to manage and retool your floorplan and dealership inventory to keep expense down and minimize risk as our industry changes.