n this module, we talked about one financing option of floorplanning.

For

this discussion, list the pros and cons of floorplanning and provide an

example of a company that would benefit from floorplanning

Floor Planning
REVIEWED BY WILL KENTON

Updated Jan 19, 2018

What Is Floor Planning?

Floor planning is a form of financing for large ticket items displayed on showroom floors or
lots. Automobile dealerships utilize floor plan financing to run their businesses. For example,
dealerships for trucks, recreational vehicles, and boats, as well as home appliance retailers
also turn to floor plan loans to purchase inventory. Specialty lenders, traditional banks, and
finance arms of manufacturers provide the short-term loans and they are repaid as the items
are sold.

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.
Despite some consolidation in the 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.

https://www.investopedia.com/terms/f/floor-planning.asp

ACCOUNTING

What Is Floor Plan Financing?

By: Bill Herrfeldt
Updated October 12, 2018

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Go to any large auto dealer and there are hundreds of cars on the lot. You may
wonder how much the dealer had to spend to provide you with almost limitless
choices. What you don't realize is that, like most new car dealers, a floor plan was
used to finance the cars. Simply, it is a way for an auto dealer to use a lender's
funds to finance the cars, and until each of them is sold, the lender holds title to the
cars. The dealer then receives payment, hopefully including a profit, and remits the
balance to the lender who, in turn, releases the title to the car to the new
purchaser. Floor plan financing is also done for large appliances, mobile homes
and boats, among other items, and these products are usually sold to consumers
with a financing contract.

Consumers Get a Greater Product Selection

Without floor planning, a dealer would not be able to have a wide selection of
merchandise in his showroom or on his lot, and most of the added features that you
can buy would most likely be in catalogs or brochures rather than there for you to
see. Also, most likely you would have to ask the dealer to order the merchandise
from the manufacturer, and it might take a month or two before your order can be
delivered to you

Floor Plan Inventory Makes It Easier for Dealers to Sell

Most dealers will agree that it is far easier to sell a product when you have it in
stock as opposed to selling it from a catalog or an ad from the manufacturer. So by
having a large inventory of products available through floor planning, dealers most
likely will enjoy increased sales and profits. If you work as a dealer, you know that
your time is at a premium. You need simple solutions to run your business, and
floor plan financing could streamline your inventory acquisition and reduce some of
your administrative costs.

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Reduces the Manufacturer's Costs

When a piece of merchandise from a manufacturer is received by the dealer who
has a floor planning arrangement with a lender, the lender notes the item and
immediately sends the manufacturer a check for it. Therefore, the manufacturer
does not have to worry about when the product is sold to the end user, so his costs
are also reduced.

Understanding Floor Plan Loans

Unlike most collateral on loans that is mostly static, the retailer is in more control of
the collateral under a floor planning arrangement, and that makes it harder for the
lender to control because it will fluctuate from day-to-day. For that reason, a lender
must physically check the inventory of a client often to make sure that his loan
remains adequately covered. Also, if inventory financed by a floor plan loan is
moving slower than expected, the lender may ask for payment from the dealer for
interest and possible depreciation of its collateral. And in a soft economy, that can
pose a serious problem both for the lender and the retailer.

Who Offers Floor Plan Financing?

Many major banks offer the floor plan arrangement to its larger retail customers.
Also, the major automobile manufacturers in the United States created GMAC,
Ford Motor Credit Co. and Chrysler Credit to provide both floor planning to its
dealers as well as to make car loans to buyers. Over the years, it order to increase
sales, these companies offered floor planning to its dealers at a lower interest rate
to encourage them to take more cars into inventory.

https://bizfluent.com/about-5065836-floor-plan-financing.html