How to Improve Cash Flow in Your Car Dealership with Smart Financing

Car dealerships need healthy cash flow to keep the business operating smoothly. Cash flow is how money moves in and out of your business, ensuring you have the money to keep the lights on, the staff paid, the marketing campaigns running, and the inventory turning over to the next vehicle year. Without healthy cash flow, car dealers may find themselves on tough financial ground, but many dealerships have a huge amount of cash flow tied up in inventory, from new vehicles to used vehicles.

That’s where car dealerships financing can come in handy. Strategic financing can help you optimize your cash flow to reduce risk and seize opportunities for growth. Just like vehicle financing, when you finance a car dealership, you give yourself the flexibility to run your business freely while paying back dealership finance agreements over time. Here, we explore practical strategies and financing options that can help you finance a car dealership and grow it to the next level.

In this article:

• How financing for car dealerships can be a strategic asset for your business.
• The best ways to finance a car dealership.

Conventional Financing for Car Dealerships

Car dealerships can leverage a variety of small business loans and funding solutions to improve cash flow and support business operations. Just like when you’re shopping for a car loan for the perfect car, it can be a good idea to go through prequalification to see what financing terms your business might qualify for, be it with a traditional lender, such as a bank or credit union, or an online lender.

Traditional lenders tend to offer higher loan amounts and lower interest rates, but online lenders can provide faster dealer financing, more flexible loan terms, and are more willing to work with borrowers with a spotty credit history or bad credit. In either case, you’ll have to submit to a credit approval process with virtually any type of finance application. If you’re looking for ways to finance a dealership, these are some of your options:

• Term loans: Conventional term loans provide a lump sum upfront payment that you repay over a fixed term. These can be useful to finance a car dealership with major business needs, like getting a new year’s inventory or opening a new location. Short-term loans, or working capital loans, are valuable resources for quick dealership finance needs, like covering a temporary payroll gap or funding a short marketing campaign.
• SBA loans: The U.S. Small Business Administration (SBA) works with lenders to partially guarantee loan amounts. This lowers the risk to both lenders and borrowers, incentivizing lenders to agree to more credit applications. There are several SBA loan programs designed for different purposes, but each tends to offer competitive annual percentage rates (APRs) and loan terms that can help finance car dealership expenses. That said, they may have strict eligibility requirements.

Dealerships, however, also have access to a range of unique financing solutions that other businesses don’t.

Floor Plan Financing

Floor plan financing is the foundation for many dealership business models. If you want to finance a car dealership, you need to understand how floor plan financing works.

Essentially, a floor plan is a revolving line of credit specifically for purchasing inventory. Instead of using your business’s cash to buy a vehicle from the manufacturer or at auction, the floor plan provider, or finance company, provides it. The vehicle is then “floored” by being placed on your lot. You pay interest and fees on that vehicle as long as it’s on the lot, and when the car is sold, you repay the loan amount. This model has become a staple way to finance a car dealership.

Floor plan financing can free up working capital. Rather than having huge amounts of cash tied up in dormant vehicles on your lot, you space out the payments on those vehicles, freeing up cash flow for other operational expenses. You’ll have the cash to upgrade the facility, train staff, attract new customers with ad campaigns, offer new car financing solutions, and much more.

A well-managed floor plan allows you to carry a larger, more diverse inventory without restricting your business’s cash flow. That not only increases sales potential, but also reduces the risk of having old, out-of-date inventory that becomes hard to sell or hard to sell at the price you need. It’s an effective way to finance car dealership inventory.

Dealership Line of Credit

A business line of credit provides you with access to a maximum loan amount that you can draw from as needed and repay. You only pay interest on what you draw, and when you repay what you’ve borrowed, you’ll have access to the full amount again. This can be a flexible funding solution to finance a car dealership’s evolving and changing needs throughout the year.

A line of credit can be an invaluable financial safety net given the day-to-day unpredictability of a car dealership. It can be useful in several ways:

• Unexpected opportunities: A line of credit supports car buying opportunities, like getting an excellent trade-in or rare vehicle at auction without waiting for a bank loan.
• Seasonal fluctuations: A line of credit can bridge the gap in slower car-selling seasons, ensuring you can still meet payroll and operational expenses.
• Capital for improvements: Whether a Toyota dealership needs to upgrade service buy equipment, a Lexus dealer needs a software license renewal, or a showroom needs a renovation, a line of credit provides the flexibility to finance car dealership expenses without disrupting cash flow.

The key is to secure a line of credit before you need it. Don’t want to have a cash flow issue to apply. A line of credit is a proactive strategy that gives you the flexibility when you need to finance car dealership operations.

Trade-In Leverage

Trade-ins are essential to closing many car sales, but they can also become a massive drain on cash flow if you don’t manage them correctly. This problem requires trade-in leverage.

When you finance a car dealership, you can create trade-in leverage strategies to more effectively manage your trade-ins. These may include:

• Maximize your floor plan: Just as you floor new inventory, you can also floor trade-ins. That can help get more eyes on the car and finance it slowly. When it sells, you can pay off the floor plan.
• Sell wholesale: Not every trade-in is a good candidate for your retail lot. Old cars or ones that don’t fit your brand can go straight to auction. You might not get the same profit, but it can be an effective way to get immediate cash flow into your business.
• Leverage partnerships: Consider establishing relationships with wholesalers or used car networks that specialize in buying trade-ins. These partnerships can provide a steady stream of quick, no-hassle cash for vehicles you don’t want to retail.

Trade-ins can be a fluid opportunity to raise money for your business without resorting to excessive financing. Effective trade-in management can be a cornerstone strategy to finance a car dealership.

Expand Payment Options

Up to this point, we’ve discussed strategies to cover your internal finances. The final strategy to finance a car dealership is actually offering solutions to your customers. The faster you can close a deal and receive payment, the better your cash flow. That’s why offering a wide range of auto financing options can be such a game-changer for your business.

While you can offer traditional bank financing options, it’s also useful to explore further into:

• Greater network of lenders: Working with both prime and subprime lenders ensures that you can find a financing solution for a broader range of credit profiles.
• In-house financing: There are risks and capital requirements for in-house financing, but a well-managed finance department can create a high-margin revenue stream for the business and provide a lifeline for customers who can’t get credit approval elsewhere.
• Flexible down payment plans: For customers who need a little more time to save up for a down payment, a flexible plan can help you secure the sale and get the vehicle off your lot faster, freeing up that inventory slot for a new car.

Making it easier for customers to purchase a vehicle can be an excellent way to finance a car dealership. Every successful sale brings more money into your business, so it’s in your best interest to make auto loans easier to get.

Final Thoughts

Improving cash flow in a car dealership requires a multi-faceted, strategic approach that leverages several financing solutions. While traditional business financing can be useful, there are several dealership finance options that can be a game-changer for your business. Between floor plan financing, lines of credit, trade-in leverage, and offering consumer payment options, you can create a stronger financial ecosystem for your business.

FAQs About Finance Car Dealership

What's the biggest mistake a dealership can make with its cash flow?

The most common mistake is tying up too much working capital in inventory. When you pay for vehicles with your own cash instead of leveraging a floor plan, that money is tied up and can’t be used for marketing, payroll, or other operational costs.

How is a floor plan different from a regular business loan?

A regular business loan is a lump sum of money that is typically paid back in fixed monthly installments over a set period. A floor plan is a revolving line of credit specifically for purchasing inventory. It’s flexible and "pay-as-you-go." You draw funds to buy a car, and you pay it back only when that specific car is sold.

Is a line of credit always a good idea?

A line of credit is an excellent tool for flexibility and addressing short-term needs, but it's not the solution for every situation. It’s best used to bridge temporary cash gaps or fund a specific, short-term project. A traditional term loan is often more appropriate for large, long-term investments like a major facility renovation and can have a lower overall cost.

Should I always sell my trade-ins at auction for quick cash?

Not always. Auctions are a good way to get quick cash for vehicles that require a lot of reconditioning. Retailing trade-ins can generate a higher profit margin, however. It’s important to have a clear process for how to assess each trade-in to find the best re-sale route.

How do I choose the right financing partner for my dealership?

The best partners to finance a car dealership are ones who understand the car industry. They can offer flexible terms and products that align with your business needs and provide dedicated support. Lenders should be more than just cash sources; they should be strategic partners.

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