Floor Plan Financing Agreement is a financing arrangement primarily used by dealerships and businesses that sell expensive, individual units of inventory, such as cars, boats, RVs, and heavy machinery. It enables these businesses to purchase and display inventory without paying the full purchase price upfront, thus preserving their working capital.

Under a Floor Plan Financing Agreement, a lender provides a revolving line of credit that the business draws on to acquire inventory. The financed products serve as collateral, meaning the lender has a security interest in the items until the loan amount for each unit is repaid. Typically, the business pays interest on the outstanding balance of each item, which accrues daily or monthly.

When an item sells, the dealership must immediately repay the principal loan amount plus any accrued interest related to that specific unit. This repayment is known as a curtailment payment. Once repaid, the credit line is replenished, allowing new inventory purchases. Lenders also perform regular “floor checks” or audits to verify inventory on site and prevent fraud.

Floor plan financing is vital for industries like auto dealerships, RV and boat sellers, motorcycle and powersports retailers, and heavy equipment dealers. It offers benefits such as increased inventory capacity, improved cash flow, and quick access to funds. However, it carries risks including interest costs on unsold inventory, mandatory curtailment payments, lender audits, and strict contractual obligations.

Key terms include:

  • Curtailment Payment: A scheduled repayment toward principal on units not yet sold.
  • Out-of-Trust (OOT): The serious breach occurring if a financed item is sold without promptly repaying the lender, causing loan default.
  • Floor Check / Unit Audit: Regular lender inspections to confirm financed inventory presence.
  • Aging Policy: Limits on how long inventory can remain without sale before requiring additional payments or payoff.

For example, if a car dealership buys five cars at $30,000 each under a floor plan with a lender, the lender pays the manufacturer directly. The dealership pays interest monthly and repays principal immediately upon sale of each car, replenishing available credit for future purchases.

Managing floor plan financing requires careful inventory tracking, understanding of contract terms, budgeting for curtailments, and maintaining good lender relations. Avoiding “out-of-trust” events is critical to prevent loan default.

To learn more about related loan topics like curtailment payments, see our article on Principal Curtailment.

For authoritative guidance, visit the Consumer Financial Protection Bureau for general business lending information.

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