Retail floor planning (also referred to as floorplanning or inventory financing) is a type of short term

loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that d ...

used by

retailers Retail is the sale of goods and services to consumers, in contrast to wholesaling, which is sale to business or institutional customers. A retailer purchases goods in large quantities from manufacturers, directly or through a wholesaler, and t ...

to purchase high-cost inventory such as

automobile A car or automobile is a motor vehicle with Wheel, wheels. Most definitions of ''cars'' say that they run primarily on roads, Car seat, seat one to eight people, have four wheels, and mainly transport private transport#Personal transport, pe ...

s. These loans are often secured by the inventory purchased as

collateral Collateral may refer to: Business and finance * Collateral (finance), a borrower's pledge of specific property to a lender, to secure repayment of a loan * Marketing collateral, in marketing and sales Arts, entertainment, and media * ''Collate ...

. Floor planning is commonly used in new and used car

dealerships A car dealership, or car dealer, is a business that sells new or used cars, at the retail level, based on a dealership contract with an automaker or its sales subsidiary. Car dealerships also often sell spare parts and automotive maintena ...

. Contrary to common perceptions, most car dealers do not pay cash for the vehicles on their lot. Even smaller dealerships can have an inventory of vehicles representing millions of dollars of

capital investment Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing is ...

. Most car dealerships use a floorplan facility to finance their inventory and factor the cost of the facility into the price presented to the consumer. The practice of using floorplan loans to finance inventory creates an incentive for the dealers to sell vehicles as quickly as possible in order to reduce the amount of interest that will accrue on the floored vehicle. Floor planning costs can run into hundreds of thousands of dollars a month for a big multi-location dealer with large inventories. In the case of new vehicles, they are generally floor planned by the manufacturer, such as

Ally Financial Ally Financial is a bank holding company organized in Delaware and headquartered in Detroit, Michigan. The company provides financial services including car finance, online banking via a direct bank, corporate lending, vehicle insurance, mortgage ...

(formerly GMAC). With used car dealers, specialty finance companies cater to their industry. Rather than offering loans for each individual vehicle purchase, most floor planning companies supply dealers with a revolving line of credit that they can use to acquire inventory, such as through automobile auctions. Floor planning (flooring) vehicles is a way to acquire inventory, but it can have negative consequences if payments (curtailments or payoffs) are not made on time. Curtailment schedules vary by floor plan providers, but they generally range from 5–20% of the original loan proceeds on each vehicle every 30/60/90/120 days. If curtailments are not made or the dealer enters into default on their obligations, floor plan companies will take action to minimize their exposure. Those actions include attaching to the bond (not all states require dealers to have bonds), repossessing the collateral, and other collection efforts. Dealers of

recreational vehicle A recreational vehicle, often abbreviated as RV, is a motor vehicle or trailer that includes living quarters designed for accommodation. Types of RVs include motorhomes, campervans, coaches, caravans (also known as travel trailers and camper ...

boat A boat is a watercraft of a large range of types and sizes, but generally smaller than a ship, which is distinguished by its larger size, shape, cargo or passenger capacity, or its ability to carry boats. Small boats are typically found on inl ...

s, and

major appliance A major appliance, also known as a large domestic appliance or large electric appliance or simply a large appliance, large domestic, or large electric, is a non-portable or semi-portable machine used for routine housekeeping tasks such as cookin ...

s may also use floor planning for all or part of their inventories.

References

Automotive industry Credit Retail processes and techniques Corporate finance {{finance-stub