floorplan financing

A revolving line of credit that allows dealers to borrow against retail inventory, repaid as the inventory is sold.

Floorplan financing is a specialized type of revolving inventory financing used primarily by dealerships that sell high-ticket retail goods, such as automobiles, recreational vehicles, boats, and heavy agricultural or construction equipment. Under this arrangement, a lender—often a bank or the captive finance arm of a manufacturer—provides a line of credit that allows the dealer to purchase physical inventory to stock their showroom or lot. The physical inventory itself serves as collateral securing the loan. As the dealer sells individual units of inventory to retail customers, they are obligated to immediately repay the corresponding portion of the floorplan loan associated with those specific units. Lenders perform regular physical audits of the dealer's lot to ensure that all inventory on the books is physically present and has not been sold without repayment, a situation known as being "sold out of trust." For equity and credit investors, floorplan metrics are critical indicators of supply chain health, dealer liquidity, and retail demand. When consumer demand slows down or interest rates rise, dealers face higher carrying costs on their floorplan debt, which directly squeezes their operating margins. If inventory sits unsold for too long, dealers may be forced to heavily discount merchandise or face severe liquidity distress, which can quickly ripple upstream and force manufacturers to curtail production.

An auto dealership uses its floorplan line of credit to purchase 10 SUVs from a manufacturer at a wholesale cost of $40,000 each, totaling $400,000. When a retail customer buys one of these SUVs, the dealer receives the retail purchase price and must immediately use $40,000 of those proceeds to pay down the principal on the floorplan loan, freeing up credit to order another vehicle.