Floor plan financing
Floor plan financing explained: what flooring is, and what it costs you
Floor plan financing is a revolving line of credit a dealership uses to buy vehicle inventory, secured by the vehicles themselves, with the principal on each unit repaid when that unit sells. Also called flooring, floorplan, or a wholesale finance line, it is the mechanism that turns lot time into a running cost.
Almost every franchised dealership runs on one. Captive finance arms flooring their own brand, banks, and independent floor plan lenders all compete for the line, and the terms differ more than most managers assume.
How does floor plan financing work?
The line is advanced per unit, not as a lump sum, and interest accrues only on the units actually financed. A $2 million line carrying $800,000 of inventory charges interest on the $800,000.
- Advance rate. New vehicles are typically floored at 95 to 100 percent of invoice cost. Used units are advanced against value at a lower rate, commonly in the 75 to 90 percent band, so the dealer funds the gap in cash.
- Interest. Priced off a floating benchmark. Harney Partners puts current pricing at SOFR plus 200 to 400 basis points depending on credit quality, and rate structures reaching SOFR plus 600 appear at the weaker end of the risk scale.
- Pay as sold. When a unit retails, the principal plus accrued interest is remitted, usually inside a short grace window of a few days.
- Audits. The lender physically verifies the units on the lot. A vehicle sold with the proceeds not remitted is sold out of trust, which typically freezes the entire line on the spot.
What is curtailment, and why does it hurt?
Curtailment is a scheduled principal paydown the lender requires on any unit still in stock past a set age. It is due whether or not the vehicle has sold, which is what makes aged inventory a cash problem rather than only a gross problem.
The schedules are tighter on used stock than on new. A common structure runs 10 percent monthly curtailment on new units starting around month ten with a maximum life near 19 months, while used units can face 10 percent monthly curtailments from as early as month four with total maturity capped around 13 months. The logic is straightforward: the collateral depreciates, and the lender reduces its exposure as it does.
Floor plan cost: a worked example
Take a $28,000 used unit floored at 85 percent, so $23,800 borrowed. At an all-in rate of 9 percent, that is roughly $5.87 a day in interest. Thirty days costs about $176. Ninety days costs about $528, and by then a 10 percent curtailment has already pulled $2,380 of cash out of the line for that single car.
Interest is only the visible part. Add insurance, lot cost, plates and depreciation and the real holding cost per unit per day runs several times the interest alone.
Why days supply is expensive
Days supply looks like an operational metric on the stock report. On the flooring statement it is a bill.
- Interest scales with both price and time. A lot averaging 60 days instead of 40 pays half again as much interest per unit retailed, on identical volume.
- Curtailment converts aging into cash out. Every unit crossing the threshold takes a chunk of available line with it, which reduces what you can buy next.
- Line capacity is finite. Capital parked in 90 day units is capital not buying fresh stock in the segments that are actually selling.
- Costs are rising. Optimum Info's Q2 2025 dealer financial analysis, cited by Harney Partners, found net floor plan expense per vehicle up roughly 39 percent, an increase of about $139 a unit, as rates held and turnover slowed.
That is the direct financial link between flooring and inventory turn. Turn is not a vanity metric for the used car manager. It is the variable that sets the interest and curtailment line on the P and L.
Where the days actually go
Interest starts accruing at acquisition, not at the moment the unit goes on the front line. Two stretches of dead time sit inside almost every aging figure and neither of them involves a customer.
- Reconditioning. Days spent in reconditioning are financed days with no chance of a sale attached. Recon cost gets tracked closely at most stores. Recon time frequently does not.
- Time to line. The gap between recon completion and the listing going live with real photos and description. The car is floored, aging, and invisible.
A firm wholesale cut-off matters for the same reason. Carrying an aged unit past the point where wholesale valuation covers the payoff turns a small loss into a larger one, one curtailment at a time.
Reading your own flooring terms
Before comparing lenders on headline rate alone, get the four terms that decide the real cost: the advance rate on used, the curtailment trigger and percentage, the grace period on pay as sold, and the audit frequency. A line at a slightly better rate with month four curtailment on used stock is more expensive than it looks if your average unit sits 55 days.
