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Automobile Floorplan Financing
I am interested in opening up a NEW and Used Car Auto Dealership. Can you give me a comprehensive detailed overview and guide to getting qualified and approved for an automobile dealership floorplan financing at the best interest rate? A step by step process on getting qualified and approved will be great. And who do I contact to get approved for an auto dealership floor plan financing? A bank, credit union, direct lender, or business finance broker?
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Auto Dealership Floorplan Financing Made Easy
- Getting floorplan financing is one of the most important things when starting a new and used car dealership.
- With this form of credit, you can buy inventory without paying for every vehicle in cash.
- Use this guide to assist you in the qualification and approval steps of the process.
All About Floorplan Financing
A floorplan financing is a type of financing that has features of a revolving line of credit, permitting the borrower to:
- Extend purchases from auctions, other dealers, or manufacturers for inventory (like vehicles).
- Receive payment only when the vehicles are sold (aged inventory usually requires “curtailment payments”).
- Use vehicles as collateral on the loan.
- Participate in periodic inventory audits.
Step 1: Have Business Prerequisites in Place
Before approaching any loaner, confirm that you have the following:
Business Structure and Registration
- An appropriate business entity, such as an LLC or Corporation, has been formed.
- The EIN (Employer Identification Number) has been secured.
Secretary of State registration completed.
- A dealer license application through your state’s DMV/regulatory body has been submitted.
Business Plan
- A market analysis.
- Projections of sales and financial forecasts.
- A marketing strategy.
- The management team credentials.
- Analysis of competition.
- Estimate of capital and where it will come from.
Physical Location
- The location in the zoning jurisdiction for auto sales has been secured.
- Permits and necessary licenses have been obtained.
- Lot size minimums have been met (this varies by state).
Step 2: Build Strong Personal Qualifications
The lenders evaluate both the business and the individual:
Credit Profile
- Personal credit score should be around 680 (700+ is ideal).
- Remediate low credit usage and negative items.
- Personal credit history should be clean.
Industry Experience
- Creditable automotive retail experience (2+ years is ideal) should be documented.
- Emphasize any management or sales roles held within the dealership setting.
- Also, include any relevant certificates or courses taken.
Demonstrates Financial Strength.
- Prepare personal financial statements. Show proof of liquidity and personal assets.
- Be ready to show personal tax returns, usually 2-3 years.
Step 3: Collection of Documents
- Begin compiling a full set of documents, which should include Business Documents and Business proposals with funding components.
- Dealer’s license or application status.
- Corporate formation papers.
- Commercial Lease for dealership location.
- Proof of insurance (garage liability, lot insurance).
- Financial Documents Personal tax returns for the last 2-3 years.
- Business tax returns (if there is an existing business).
- Personal financial statement.
- Personal and business bank statements.
- Proof of available capital for down payment/reserves.
Operational Documents
- Inventory control plan.
Sample Dealer Management System (DMS):
- Any franchise agreements for applicable dealers.
- Biographies of key management team members.
Step 4: Investigate sources for floorplan financing.Several floorplan credit sources are available: Conventional Banks.
- Usually, they have fairly stiff competition, so it is commonplace to see stiff competition for the most common services.
- It always requires an established business history.
- Sometimes, it provides further banking service amenities.
- They include Wells Fargo, Bank of America, and sometimes regional commercial banks.
Specialist Floorplan Lenders
- These lenders are exclusively focused on financing dealership floorplans.
- Newer dealerships tend to see these more often.
- They possess a tendency to have more liberal policies when it comes to newer dealerships.
- They often boast speedier approvals and sharper business acumen.
- NextGear Capital, AFC, and Ally Financial.
- These all exemplify Captive finance companies.
Manufacturer-affiliated financing (Ford Motor Credit, GM Financial)
- Most suitable for franchised dealerships selling new vehicles.
- They might provide better rates for their branded products.
Credit Unions
- Occasionally extend floorplan financing to their members.
- Usually, they have more lenient conditions than standard banks.
- Poorer credit lines are often available.
Business Finance Brokers
- Your application can be submitted to many lenders.
- Convenient for novice dealers with no established connections
- May provide where direct applications fail to deliver
Step 5: Application Procedure
- Initial Investigation: Approach certain lenders to inquire about their criteria.
- Pre-Qualification: Give some basic details so an estimate of the chances of approval can be made.
- Complete Application: Complete the application package.
- Underwriting: The lender examines the application and the attached documents.
- Site Inspection: The lender goes to the borrower to check whether the facilities are as claimed.
- Approval: Granting the credit line subject to specific terms and conditions
- Finalize Agreement: Go through the floorplan agreement and sign it.
- Initial Audit Setup: Set up procedures and expectations for reporting audits.
Step 6: Negotiating TermsNotable components to negotiate are:
- Interest Rates
- The prime rate plus a margin (normally 1-4 over prime)
- Fixed and variable rate possibilities
- Reduction based on preferable performance
Credit Line Amount
- Starting line amount
- Possible increases based on good performance
- If relevant, seasonal adjustments
Fee Structure
- Origination fees: 0.5-2 percent of the line
- Per unit funding costs
- Vehicle inspection charges
- Audit renewals charges
Edit Restrictions
- Timeline before paying in parts (commonly 90-180 days).
- A minimum percentage of payment is to be made at curtailment.
- The system is expected to be fully paid off for aged inventory.
How to Get the Most Favorable Rates and Conditions
- Make a strong down payment: Being able to pay 20-30% towards your inventory displays monetary commitment.
- Show Industry Knowledge: A thorough understanding of the auto industry and automobile auctions.
- Submit a Conservative Business Plan: A realistic approach is more admirable than being optimistic.
- Develop Banking Relationships Early: Open accounts with possible banks before applying.
- Think of Starting Smaller: Lesser lines of credit with good take-up are more useful than excessive ones.
- Use Competing Quotes: Take better offers and use them for negotiations.
- Have Solid Cash Reserves: Lenders prefer dealers with 3-6 months of operating expenses in reserve.
Different Challenges for New Dealers
Inexperienced:
- Develop partnerships with professionals who have been around for a long time or have joined a dealership mentorship program.
Credit Restrictions:
- Work towards building strong personal credit before applying.
Capital Reserves:
- Most lenders require a liquid reserve between 10-20% of the floorplan amount.
Timeline Considerations:
- The process usually takes 60-90 days from funding application.
What Comes After An Approval?
- Implementing an inventory control system for monitoring floorplan vehicles.
- Devise accounting procedures for processing payments on floorplans.
- Be Ready for periodic audits (virtual and physical).
- Build networks at auctions and with wholesalers.
- Evaluate alternative floorplan funding sources in anticipation of future growth.
Suppose you follow this in-detail approach and prepare meticulously before application. In that case, you can obtain wonderful floor plan financing for your new dealership through well-versed planning.