Well… the short answer is in a variety of different ways.
Now don’t take this wrong and think that ah ha… another way to scam and separate the most hard earned money they can from their customers.
Not in this case anyway.
All businesses must have a variety of different revenue sources if they are to prosper and pay their employees.
This article deals with an aspect of a car dealer’s revenue commonly called floor plan or floor planning.
Floor plan is not something that is generally known to the public simply because it doesn’t directly affect the cost of the car but it does affect the profitability of the dealership.
A common question is how in the world to car dealers make money when they advertise or otherwise claim that they are selling their cars at or below their invoice price?
First of all a dealer’s actual invoice or dead cost is a rather nebulous figure to arrive at… but let’s stick with floor plan.
Most dealerships choose to floorplan their inventory. This simply means they carry a mortgage or credit account against their inventory, meaning they borrow money to provide the inventory that sits on their car lot… and this is a quite normal aspect of the cost of doing business. It’s simply a rotating effect where one car is paid off when it’s sold and the next car comes off the transport truck and is added to the dealer’s floorplan.
Depending upon the agreement the dealer or ownership group has with their bank, the bank will floorplan the inventory for a period of time for the dealer at no cost. Usually between 30 and 90 days of free floorplanning (no interest charge on the credit).
Now… if the car is sold during the free period, the dealer will get a credit for the difference in days. For example if the dealer is on a 90 day floorplan and they sell a car within 10 days of floorplanning it, then the dealer gets 80 days of credit… and this is a good as cash because the credits will go back to the dealer at the end of each billing cycle.
Starting to see the revenue opportunity here?
You can probably see that it behooves the dealer to not only tightly manage the inventory, but to turn it over (sell it) quickly. The better the dealer does this, the bigger the credit (floorplan) check at the end of the month.
I mean do the math here. Just to make the math very easy… let’s say a dealer pays $5 per day in interest charges that a car is floorplanned. 50 days of credit back to the dealer would be $250.
Since a dealer can carry anywhere from a couple hundred cars (larger dealers carrying over a thousand cars) in their floorplanned inventory… you can see that if they effectively manage and turn their inventory, they can get a nice check kicked back to them each and every month.
Cars that sit on the lot beyond the floorplan grace period begin costing the dealer money in terms of interest payments to the bank. This is why dealers like to move those cars that are on the brink of costing them more money.
So there you go… that’s how dealers who are on a floorplan agreement with their banks can actually sell you cars at what is technically at or below the actual number that is associated with the invoice.
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