Understanding Floor Plan Financing Terms

When it comes to financing inventory for a dealership or retail business, floor plan financing is a common and useful option. This type of financing allows businesses to borrow money to purchase inventory, using the inventory as collateral. However, to fully take advantage of this financing option, it is important to understand the terms associated with floor plan financing. In this article, we will explore some key floor plan financing terms that businesses need to know.

1. Advance rate:
The advance rate refers to the percentage of the cost of inventory that a lender is willing to finance. This percentage can vary depending on the lender and the type of inventory being financed. For example, some lenders may offer an advance rate of 80%, meaning they will finance 80% of the cost of the inventory, while the business is responsible for covering the remaining 20%.

2. Interest rate:
The interest rate is the cost of borrowing money from a lender, expressed as a percentage. This rate can vary depending on factors such as the lender’s risk assessment of the borrower, market conditions, and the term of the loan. It is important for businesses to carefully review and negotiate the interest rate with the lender to ensure that they are getting the best possible terms.

3. Floor plan financing term:
The floor plan financing term refers to the length of time that the business has to repay the loan. This term can vary depending on the lender and the type of inventory being financed. It is important for businesses to select a financing term that aligns with their sales cycle and cash flow needs to avoid any financial strain.

4. Curable and incurable losses:
Curable losses are losses incurred by the business that can be rectified, such as damaged inventory that can be repaired or sold at a discount. Incurable losses, on the other hand, are losses that cannot be rectified, such as stolen or lost inventory. Lenders may have different policies on how curable and incurable losses are handled, so it is important for businesses to clarify these terms with their lender before signing a floor plan financing agreement.

5. Recourse and non-recourse financing:
Recourse financing means that the borrower is personally liable for the loan, and the lender can go after the borrower’s assets in the event of default. Non-recourse financing, on the other hand, means that the lender can only repossess the inventory being financed and cannot go after the borrower’s personal assets. Businesses should carefully consider their risk tolerance and financial situation when choosing between recourse and non-recourse financing options.

6. Repossession rights:
Repossession rights refer to the lender’s ability to take back the financed inventory in the event of default. These rights are typically outlined in the floor plan financing agreement and can vary depending on the lender. Businesses should review these rights carefully to understand the consequences of defaulting on the loan and to ensure compliance with the lender’s policies.

7. Inventory aging:
Inventory aging refers to the length of time that inventory has been sitting unsold. Lenders may have specific requirements regarding inventory aging, such as limits on the age of inventory that can be financed or fees for aging inventory. Businesses should monitor their inventory aging closely to avoid any penalties or restrictions from the lender.

In conclusion, floor plan financing can be a valuable tool for businesses looking to finance their inventory. By understanding the key terms associated with floor plan financing, businesses can make informed decisions and negotiate the best possible terms with lenders. It is important for businesses to carefully review the advance rate, interest rate, financing term, curable and incurable losses, recourse and non-recourse financing, repossession rights, and inventory aging to ensure a successful floor plan financing arrangement. By doing so, businesses can effectively manage their inventory financing needs and support the growth of their business.