Did you ever wonder how car dealerships could afford to stock all those new and used cars? Many auto manufacturers offer what is commonly called car dealer floor plans for new car dealerships to stock inventory both new and used cars. In other words very often the financing division of the automakers are floor planning a dealerships inventory and when the car dealer sells a vehicle they pay for the car. This is a very common practice for businesses that carry large amounts of inventory, but there is a catch and the catch is that there are carrying or interest charges on that inventory.
That’s right, every car on the lot is accruing interest charges on a daily basis, which can add up very quick. This can be a very substantial cost of doing business, but most automakers will provide a financial reserve to help cover some of these car dealers floor plan costs. However these allowances to cover these expenses only cover these carrying costs for a short period, which varies with manufacturers and dealerships. In other words the faster you sell your inventory the more profit there is to make because you can reduce the interest charges. The amount of profit is important, but cutting these costs are also very important.
Inventory and Car Dealer Floor Plans
The charges paid by car dealerships on a monthly basis can be a staggering amount. If a dealership sells a car that just arrived at the dealership a few days ago they are money ahead, because they get to keep the finance reserve to cover a portion of their monthly carrying charges. However, if it takes, 3, 6 or 9 months to sell a car the car dealer floor plan charges on that vehicle that be costly.
When it comes to owning and operating a car dealership, turning inventory at an acceptable pace is critical to keep dealer floor plans costs down. All automakers have different terms and allowances on their car dealer floor plans, which is also determined by the volume of vehicles a dealership sells on a regular basis. The auto manufacturers want dealers to sell cars, lots of cars and they are willing to reward those that move more units as you will see I the section called dealer cash and secret money.
The Consumer and Car Dealer Floor Plans
The consumer doesn’t need to worry about car dealer floor plans because most sales people and sales managers aren’t even in the know when it comes to floor plans and carrying charges. This information is typically only available upper management and owners and certainly not a point that will be of any value when it comes to buying your next car, but you can certainly understand how important it is for dealers to sell as many cars as possible every single month. This type of desperation to sell cars is what we want to use to our advantage when we buy a car, which we will be discussing, in the coming chapters of this car-buying guide.