What is a "floor plan" in car dealership financing?

A "floor plan" in car dealership financing refers specifically to a short-term loan that dealerships use to finance their vehicle inventory. This type of financing allows dealerships to stock their lots with vehicles without having to pay the full purchase price upfront. Instead, they can borrow money against the value of the cars they have in inventory, typically with the expectation that they will sell these vehicles within a few months.

The short-term nature of these loans is crucial, as it enables dealerships to manage their cash flow effectively while they are selling vehicles. Once a vehicle is sold, the dealership pays off the floor plan loan with the proceeds, allowing for a quick turnover of inventory and continued financing for new stock. This system helps dealerships maintain a diverse inventory without the financial burden of owning the vehicles outright until they are sold.