Show pageOld revisionsBacklinksBack to top This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong. ======Floorplan Financing====== Floorplan financing is a form of short-term lending that acts as a lifeline for retailers selling big-ticket items. Think of car dealerships, RV sellers, or heavy equipment suppliers. Instead of paying cash upfront for all those shiny vehicles on the lot, the dealer uses a revolving [[line of credit]] from a lender to purchase inventory from the manufacturer. The twist? The inventory itself—the cars, boats, or tractors sitting on the showroom floor or lot—serves as the [[collateral]] for the loan. When a customer buys a car, the dealer pays back the portion of the loan for that specific vehicle, plus interest, to the lender. This arrangement allows dealers to stock a wide variety of products to attract customers without tying up vast amounts of capital. The lender, often a specialized financial institution or a manufacturer's own lending arm (known as a [[captive finance company]]), periodically audits the dealer's inventory to ensure the collateral is all present and accounted for. It's a symbiotic relationship, but one that carries significant risks for the unprepared investor. ===== How It Works: A Trip to the Car Lot ===== Imagine a local Ford dealership, "Main Street Motors." They want to stock their lot with 50 new Ford F-150s, but paying for them all at once would drain their cash reserves. Here’s how floorplan financing makes it happen: - **Step 1: The Loan:** Main Street Motors secures a floorplan financing agreement with Ford Motor Credit, Ford's captive finance company. This gives them a credit limit large enough to purchase the desired inventory. - **Step 2: The Purchase:** Ford ships 50 trucks to the dealership. Ford Motor Credit pays the factory directly on the dealer's behalf. The loan is now active, and interest starts to accrue. Crucially, Ford Motor Credit technically holds the titles to the vehicles. - **Step 3: The Sale:** You walk in and buy one of those F-150s. As part of the sale's paperwork, Main Street Motors uses a portion of your payment to repay Ford Motor Credit for that specific truck, plus any interest owed on it. Once paid, the title is released, and you can register it in your name. - **Step 4: The Audit:** Every so often, an auditor from Ford Motor Credit will visit Main Street Motors with a list of all the vehicles they've financed. They'll walk the lot and check the Vehicle Identification Numbers (VINs) to make sure every truck is either physically present or has been properly paid off. This prevents a dealer from selling a car and pocketing all the cash without repaying the loan (a situation charmingly known as "selling out of trust"). ===== The Value Investor's Angle: Kicking the Tires on the Business ===== For a value investor, understanding a company's reliance on floorplan financing is not just an accounting detail; it's a critical look under the hood of the business model. Companies that use this type of debt are highly sensitive to economic shifts and interest rate changes, offering both opportunity and peril. ==== Reading the Financial Dashboard ==== When you analyze a dealership group like AutoNation or a boat manufacturer like Brunswick Corporation (which has both a manufacturing and a dealer financing arm), you need to know where to look. * **Profitability and Interest:** Floorplan interest is a direct hit to profitability. You'll find it on the [[income statement]], often listed as "floor plan interest expense." In a rising interest rate environment, this expense can balloon, squeezing already thin profit margins. A smart investor compares this cost as a percentage of revenue over time and against competitors. * **The Balance Sheet:** This debt isn't your typical long-term loan. It's usually listed on the [[balance sheet]] under current liabilities as "floor plan notes payable" or a similar title. A key insight is to compare the size of this debt to the company's inventory. If the floorplan debt is consistently much higher than the value of inventory, it could be a red flag. ==== Spotting Red Flags ==== Floorplan financing can quickly turn from a useful tool into a heavy anchor. Here are the warning signs to watch for: * **Aging Inventory:** The mortal enemy of a floorplanned business is inventory that doesn't sell. The longer a car sits on the lot, the more interest accrues. Worse, lenders often impose extra fees called //[[curtailment]]// payments, where the dealer must start paying down the principal on unsold inventory after a certain period (e.g., 90 days). A rising [[inventory turnover ratio]] is a healthy sign, while a falling one signals trouble. * **Rising Interest Rates:** These businesses face a nasty double-whammy from rising rates. First, their direct borrowing costs go up, slashing profits. Second, higher rates make it more expensive for customers to get car loans, which dampens demand and slows sales. This combination of higher costs and lower revenue can be brutal. This is a classic example of [[interest rate risk]]. * **Economic Downturns:** During a recession, people stop buying expensive items like cars and RVs. For a dealer, this means inventory sits, curtailment fees kick in, and cash flow dries up. As a value investor, you must recognize the highly cyclical nature of these businesses and demand a significant [[margin of safety]] before investing.