What dealers use to buy cars for their lot
Car dealers do not usually pay cash for the vehicles sitting on their lot. Instead, they borrow money through floor plan financing — a loan specifically designed so dealers can purchase inventory without depleting their operating capital. The lender (often a bank, credit union, or captive finance company owned by a manufacturer) pays the dealer's supplier directly, and the dealer repays the loan when the vehicle sells.
This is different from a traditional business loan. The vehicle itself serves as collateral, and the lender typically holds the title until the loan is paid off. The dealer pays interest on the outstanding balance, and many lenders charge a monthly "flooring fee" — a small percentage of the total inventory value — whether or not vehicles have sold.
Dealers also use other forms of borrowing to fund operations, purchase land or buildings, or cover seasonal cash flow gaps. Understanding which loan type fits which purpose helps a dealer manage cash flow and avoid overleveraging.
Key Takeaways
- Floor plan financing lets dealers borrow against inventory, with the lender paying suppliers directly and the dealer repaying when vehicles sell.
- Captive finance companies (owned by manufacturers like Ford or Toyota) often offer floor plan loans with lower rates than independent lenders, but require dealers to sell that brand.
- Banks and credit unions offer floor plan loans to multi-brand dealers and typically require a personal may provide from the owner plus proof of dealer licensing and sales history.
- Monthly flooring fees, interest rates, and payoff terms vary by lender and by the dealer's credit profile and sales volume.
- Dealers also use term loans, lines of credit, and equipment financing for facilities, renovations, and working capital separate from inventory purchases.
Floor plan loans from captive finance companies
Captive finance companies are owned by vehicle manufacturers — Ford Credit, Toyota Financial Services, and General Motors Financial are the largest. These lenders offer floor plan financing exclusively to dealers who sell their brand. Because the manufacturer controls both the dealership and the financing, captive lenders can offer competitive rates and streamlined approval.
A dealer typically applies through the manufacturer's dealer portal or finance department. The lender verifies the dealer's license, reviews recent sales history and credit, and sets a credit line based on the dealer's inventory needs and track record. Once approved, the dealer can draw against that line to purchase vehicles from the manufacturer's distributor or auction.
The advantage is lower rates — captive lenders often charge 1 to 3 percentage points less than independent banks because they have direct visibility into the dealer's sales and can repossess vehicles quickly if needed. The trade-off is that the dealer can only use the line for that manufacturer's vehicles, and the lender may require the dealer to maintain a minimum inventory level or sales target.
Floor plan loans from banks and credit unions
Independent banks and credit unions offer floor plan financing to multi-brand dealers and used-car dealers who do not may have access to for or prefer not to use captive financing. These lenders compete on rate and terms, and a dealer can shop multiple lenders to find the best offer.
The process process is more involved than with a captive lender. The bank will request the dealer's business tax returns (usually two to three years), a personal financial statement from the owner, proof of dealer licensing, recent sales records, and sometimes a personal may provide. The lender may also conduct a site visit to inspect the lot and verify inventory.
Interest rates from independent lenders typically range from 4 to 8 percent, depending on the dealer's credit score, sales volume, and the lender's risk appetite. Flooring fees usually run 0.5 to 1.5 percent per month of the outstanding balance. Some lenders charge a flat monthly fee instead, which can be cheaper for dealers with high turnover.
Term loans and lines of credit for operations
Beyond inventory financing, dealers use term loans to purchase or renovate facilities, buy equipment, or cover seasonal working capital needs. A term loan is a lump sum borrowed upfront and repaid over a fixed period — typically three to seven years for real estate or equipment, and one to three years for working capital.
A line of credit works differently: the lender approves a maximum amount, and the dealer draws only what is needed and pays interest only on the amount borrowed. Lines of credit are useful for dealers with uneven cash flow — for example, a used-car dealer might draw heavily before the holiday selling season and repay in January.
Both require the same documentation as a floor plan loan: tax returns, personal financial statements, and a personal may provide from the owner. Rates are typically higher than floor plan rates because the lender has no specific collateral (or only real estate collateral), and repayment depends on the dealer's overall business performance rather than vehicle sales.
SBA loans for dealers buying or expanding
Dealers who want to purchase a dealership, build a new facility, or make a major expansion may may have access to for a Small Business Administration (SBA) loan. The SBA does not lend directly; instead, it guarantees a portion of the loan (usually 75 to 90 percent) to a bank, reducing the bank's risk and allowing the dealer to borrow at a lower rate.
SBA loans have longer terms than conventional loans — up to 10 years for real estate and equipment — and lower down payment requirements. The trade-off is a longer approval process (often 60 to 90 days) and more paperwork, including a detailed business plan and personal financial disclosure.
The dealer applies through a bank that participates in the SBA program, not directly to the SBA. The bank handles the process, and the SBA reviews it before approving the may provide. Interest rates are typically 2 to 3 percentage points above the prime rate, and the dealer pays an SBA may provide fee (usually 2 to 3 percent of the loan amount).
What lenders look for when underwriting dealer loans
Lenders evaluate dealer loan applications using several key metrics. Debt service coverage ratio — the dealer's annual profit divided by annual loan payments — must usually be at least 1.25, meaning the dealer's profit is at least 25 percent higher than what is needed to cover the loan. Lenders also look at inventory turnover (how quickly vehicles sell), days sales outstanding (how long it takes to collect payment from customers), and the dealer's personal credit score.
Licensing and legal standing matter too. The dealer must hold a current dealer license in good standing, have no outstanding liens or judgments, and (for captive financing) maintain an active franchise agreement with the manufacturer. Some lenders also require the dealer to maintain a minimum cash reserve — often 30 to 90 days of operating expenses — to weather slow sales periods.
The owner's personal may provide is almost always required, meaning the owner is personally liable if the business cannot repay. This is why lenders also review the owner's personal credit score, other debts, and personal assets. A dealer with strong personal credit and a clean business record will receive better rates and higher credit limits than one with recent late payments or tax liens.
Comparing rates and terms across lenders
Floor plan rates and terms vary significantly by lender, so shopping around can save a dealer thousands of dollars per year. The table below shows typical ranges, but actual rates depend on the dealer's credit profile, sales volume, and the current interest rate environment.
| Lender Type | Typical Interest Rate | Flooring Fee | Approval Time | Best For |
|---|---|---|---|---|
| Captive Finance | 1–3% | 0.5–1% monthly | 1–2 weeks | Single-brand dealers with strong sales |
| Bank (Independent) | 4–8% | 0.5–1.5% monthly | 2–4 weeks | Multi-brand or used-car dealers |
| Credit Union | 3–7% | 0.5–1.2% monthly | 2–3 weeks | Dealers with credit union membership |
| SBA Loan | Prime + 2–3% | N/A (real estate/equipment) | 60–90 days | Facility purchase or major expansion |
When comparing offers, look beyond the interest rate. A lender charging 5 percent but requiring a 1.5 percent monthly flooring fee may cost more than one charging 6 percent with a 0.75 percent fee, depending on inventory turnover. Also ask about prepayment penalties — some lenders charge a fee if the dealer pays off the loan early, while others do not.
Frequently Asked Questions
Can a new dealer get floor plan financing?
New dealers face stricter underwriting because they have no sales history. Captive lenders may require the owner to have prior dealership experience or a strong personal credit score. Independent banks often require 12 to 24 months of operating history before approving a floor plan line. A new dealer may start with a smaller line and prove sales volume before requesting an increase.
What happens if a vehicle does not sell and the flooring fee keeps growing?
The dealer continues paying interest and flooring fees until the vehicle sells or is removed from the lot. Some lenders allow the dealer to return unsold inventory to the auction or manufacturer, but this may trigger a restocking fee or require the dealer to absorb a loss. Dealers typically set a "age limit" — for example, 90 days — after which slow-moving vehicles are marked down or returned.
Can a dealer use floor plan financing to buy used cars from other dealers or auctions?
Yes, but terms differ. Captive lenders typically finance only vehicles from their manufacturer. Independent banks and credit unions often finance used-car inventory from auctions or other sources, though rates may be higher because the lender has less control over the vehicle's condition and resale value.
What is the difference between a flooring fee and interest?
Interest is charged on the outstanding loan balance and decreases as the dealer repays. A flooring fee is a monthly charge based on the total inventory value and does not decrease until vehicles sell and the balance drops. Some lenders combine both; others charge only interest. Ask the lender to show the total cost of both over a year to compare offers fairly.
Do dealers need a personal may provide, or can they borrow on the business alone?
Nearly all lenders require a personal may provide from the owner, meaning the owner is personally liable if the business defaults. Some lenders may waive this for very large, well-established dealers with strong cash flow and significant assets, but this is rare. The personal may provide protects the lender and typically results in lower rates because the owner has "skin in the game."