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UNDERSTANDING THE BASICS OF FLOOR PLAN FINANCING IN CANADA

"It takes money to make money." - Titus Maccius Plautus, ancient Roman playwright

Floor plan financing in Canada is clearly a niche financing industry.

Floor plan finance solutions in Canada allow dealerships in various industries to purchase and finance inventory - The inventory finance lender provides a line of credit solutions that allow a business to purchase inventory for resale. Borrowers under a floor plan facility pay financing costs until inventory is sole - many different industries utilize this type of financing to generate sales revenues without having to make significant capital outlays or investments. An auto dealership is a good example of floor plan finance utilization.

The landscape for floor plan financing has changed dramatically over the years, with this type of financing becoming a very specialized field when it comes to the need to purchase inventory for resale. Cash flow needs around inventory and product are key to understanding the solution of a floor plan financing provider for a dealer's inventory when you need to obtain financing.

WHAT IS INVENTORY FLOOR PLAN FINANCING?

The floor plan finance solutions allow short-term financing of inventories for distributors and retailers - Floor planning allows the manufacturer or distribution segment of an industry to satisfy client needs and demands.

CUSTOM FLOOR PLANNING OPTIONS

Many types of assets can be on a lot or floor for several months - floor plan finance companies take security on assets for clients who require floor planning and who are financially stable. Typically floor plan loans are accompanied by periodic inventory checks/ collateral audits via a floor plan auditor and via verification of serial numbers/ VIN numbers as well as the requirement for proper insurance to be in place.

Flooring plans allow for the commercial lender to register security on assets while dealers and distributors hold possession of inventory for resale - As assets are sold loans are paid down - with the process being known as ' cash interest-based inventory management.

KEY BENEFITS OF FLOOR PLANNING OPTIONS

A dealer floor plan funding solution allows distributors and retailers to increase purchasing power in their businesses. At the same time, they have the ability to grow sales by the ability to have more products on hand, as well as making strategic purchases around product price when opportunities become available

WHAT IS A FLOOR PLAN USED FOR?

A solid asset finance solution allows for payment to the seller/manufacturer with the requirement of a dealer to pay vendors as the product is old - That cash flow solution over a longer period of time will allow sellers to turn assets and generate profits within their business cycle.

BUSINESS FINANCIAL SOLUTIONS

As with many other types of business financing, a solid asset finance solution such as a floor plan facility allows the business to deploy capital in other areas of growth and expansion.

This type of focus on inventory management and asset management turnover is important to Canadian business owners and financial managers.

Your business has the need for inventory and floor plan financing that gives you the amount of credit limit you require to grow and prosper.

Interest rates charged on floor plan financing are important – equally as important is your ability to maintain enough gross margins to absorb floor planning charges and still generate a profit.

Floor plan financing in Canada is available for any wholesaler or retailer who is aligned with reputable manufacturers. Historically floor plan financing was for select industries but now it has broadened to a variety of consumer and commercial products. In the 1980s and 1990s, floor planning of computers for OEMs and Value-added Resellers was an important component of the computer industry.

Floor plan financing is all about inventory management. You need inventory as your products are sold to your customer base.

In many cases, it also makes serious sense to ensure you have a financing program in place with the customer base also that is a logical extension of the floor plan financing that you yourself carry.

Floor plan financing is somewhat of a ‘risk-based financing, in that your floor plan lender always carries the risk that your firm might sell products ‘out of trust‘ – which is the finance terminology for the collateralization of your inventory by your floor plan financing firm.

FLOOR PLAN FINANCING REQUIREMENTS

A significant amount of emphasis on any floor planning arrangement is the focus that is put on your firm's overall creditworthiness and ability to conduct business in an honest and ethical manner. Clearly, your business model also necessitates that you have strong inventory and control systems in place which allow you to report regularly on the inventory that is financed, i.e. how to account for floor plan inventory.

In Canada, the Person Property Security Act and the concept of ‘security interest ‘is the lending documentation by which your inventory is financed and collateralized.

STREAMLINING INVENTORY MANAGEMENT WITH FLOOR PLAN FINANCING IN CANADA

While physical inspections and regular and ad hoc audits are key elements of floor plan financing clearly the use of technology and the internet has significantly enhanced your ability to interact with your floor plan lender. At the root of all floors, planning is the ability of the manufacturer, yourself, and the floor plan financier to communicate effectively. The overall creditworthiness of your company drives the final decision on what amount of maximum floor planning credit line can be provided.

We often speak to our clients regarding floor planning facilities on the need for your business to understand your inventory turns – in a perfect world, you want to have a strong inventory turnover which will drive a lower cost of carrying floor plan financing. In many cases the receivables you generate out of a sale of inventory can help to bolster your overall floor plan financing arrangement.

The ‘worst-case scenario‘ in any floor planning arrangement is your firm's inability to pay the floor plan financing at which point measures are taken to repossess the product. No one wants that of course. That’s the most negative aspect of floor plan financing – the positive aspect is that it provides tremendous financing power for sales growth.

KEY TAKEAWAYS FOR FLOOR PLAN FINANCING CANADA

Floor plan finance options are widely used in dealership/distribution type financing for many different asset categories

Companies will often need a combination of retail and wholesale finance options for growth objectives

Independent dealers cannot always rely on a manufacturer to provide financing

Floor plan funding is often part of a line of credit solution

Floor plan finance firms assist in areas of credit risk

CONCLUSION - FLOOR PLAN FINANCING CANADA

Floor plan financing is a key element of business finance for any wholesaler or retailer of manufactured products by well-known household and industrial names. Speak to 7 Park Avenue Financial, a credible, trusted and experienced financing advisor in this area to determine how to floor plan financing in Canada works and how specialty finance companies fill the need to improve your revenues and profits.

Talk to the 7 Park Avenue Financial team about the costs of financing and the overall values in a floor planning facility that meets the flexibility and pricing you require to run and grow your business.

FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK / MORE INFORMATION

What is a floor plan in financing?

Floor planning solutions are inventory financing solutions for many different asset collateral categories - Distributors and retailers use these short-term loan programs from floor plan lenders and lines of credit from different financial institutions to purchase products for repayment until sold. Floor plan audits by the lender are a common business practice in the industry - for example, auditing auto dealerships.

Wholesale financing solutions in inventory finance/dealership financing will often involve a revolving line of credit allowing the borrower to repay inventory purchases and allowing for more control of their business - as well as helping to generate sales and better profit margins in the business.

Asset categories that use floor plans from commercial lenders include car dealerships/vehicle stock, trucks, recreational vehicles, appliances/retail goods, and construction and industrial equipment. The automotive industry is a large user of floor plan finance solutions based on the unique needs of the industry to carry product.

This ' pay as sold' floor plan dealer financing allows borrowers to buy inventory without the use of excessive upfront capital and the financial will typically bring a level of financial stability to the business while ensuring long-term growth and maximizing short-term product opportunities while controlling expenses and cash flow given the ability to extend repayment to the manufacturer.

Friday, February 24, 2023

Factors To Consider In Floor Plan Financing In Canada