Q:

How do automotive dealerships finance their inventory?

A:

Quick Answer

Dealerships use a floor plan model in order to finance all of their inventory. A floor plan model resembles a line of credit that allows dealerships to accepts loans toward the purchase of newer vehicles.

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Full Answer

Floor plans allow a buyer the opportunity to buy several vehicles using a single line of credit. The amount per credit varies and can range from $20,000 to $1 million. When a dealership uses a floor plan, the purchased vehicle ensues a line of interest. After the vehicle sells, presumably at a marked-up rate, the dealership pays off the remaining interest and keeps the profit from the sale.

Although floor plans are useful in keeping the purchases organized, there is still a chance for a dealership to lose money. It is recommended for new dealerships to use small floor plans to stock up their inventory, as each line of unpaid interest will pile up. If too much interest on a purchased vehicle is owed, the amount of profit that can be generated from it will lower. This will cause the new businesses to either match their investment or lose money.

Dealerships may also use their own funds when purchasing newer vehicles for their stock. This is achieved by the dealership accepting trades-in from customers or by buying vehicles from auctions.

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