Floorplan Interest Isn’t Just a Finance Line Item – It’s a Profitability Leak
For automotive dealers, floorplan interest shows up on the financial statement just like any another expense line; it’sa routine cost of doing business. Realistically, it can represent a significant profitability leak if not properly monitored. Failing to pay attention to interest expense can be a significant drain on a dealership’s cashflow that will can subtly erode profit margins over time. Beyond the lost profit reflected in their books, dealers that have other sources of business interest expense may be missing out on valuable tax deductions under Internal Revenue Code Section 163(j), which can limit the deductibility of business interest. In other words, unmanaged interest expense can hurt twice: once operationally and once at tax time.
New Floorplan Considerations
Are You Getting a Competitive Rate on Your Floorplan?
One of the easiest ways to reduce your floorplan expense is exploring whether the rate you are receiving from your lender is competitive with what other available lenders are offering. While sometimes it makes sense to keep your floorplan with a specific institution (be it for a relationship with the lender, having other loan or bank accounts with them, etc.), if you simply have a transactional relationship with your lender you may find the market can offer you better terms than what you are receiving currently.
Are You Taking Advantage of Your Manufacturer Floorplan Assistance Program?
Most, if not all, auto manufacturers offer some sort of floorplan assistance with their new units that a dealer has for sale, but does the dealer understand how long the offset will cover the interest expense of the unit being on the floorplan? The assistance is only temporary help for the dealer, and you should pay attention to units when you have reached the end of what the assistance will cover. Moving older units that you are no longer receiving assistance for will help reduce the amount of extra expense you have to incur.
Is the Dealer Properly Leveraging the Lenders Cash Management Features?
Some lenders have integrated cash management accounts that allow for excess cash on hand that the dealer may have for other investment opportunities to be put on deposit with the institution and earn interest that will be used offset expense. Dealers with a good understanding of their cashflow needs and working capital requirements can strategically invest idle cash in the business in such a manner that they can further reduce their floorplan expense.
Used Floorplan Considerations
Paying Cash for Used Inventory Instead of Financing
Unlike new inventory, which comes with manufacturer assistance programs, used inventory has no such programs that help offset the expense of financing units in inventory. Depending on the size and value of the used inventory on hand, this could represent a significant drain on cash through financing the purchase of used inventory. An alternative use for idle cash on hand would be to purchase used inventory rather than finance and avoid the expense all together.
Does the Dealer Have Strong Inventory Controls/ Policies to Prevent Aged Units?
If a dealer chooses to finance used inventory, they should be ensuring they have policies and controls in place that keep units moving. Nothing drains cash faster than having old units sitting on the lot and floorplan just eating up expense and potentially depreciating in value of what it can be sold for. Having policies in place - such as writing down units after 45 days and wholesaling after 90 days - will keep inventory moving and interest expense down.
Conclusion
Floorplan interest is more than a routine operating cost — it is a controllable factor that directly impacts profitability and cash flow. By regularly evaluating financing rates, understanding manufacturer assistance programs, leveraging cash management tools, making strategic cash purchases, and maintaining strong inventory controls, dealers can significantly reduce unnecessary interest expense. Dealers should work closely with their CPA or financial advisor to review their current structure and identify opportunities for improvement.