Floor Planners Meet Challenge of Rising Rates

Rising interest rates mean higher costs for dealers floor planning their inventory.

Typically, floor plan rates are prime-plus. So as the Federal Reserve hikes interest rates, floor plan costs rise.

For some dealers, this is a new experience.

The Fed started its process of increasing rates in December 2015. This was the first increase in almost a decade.

Since then, rates have risen five times, with the pace accelerating in the past year.

Jim Money, president of Automotive Finance Corp., said the Fed is doing a good job in handling the increases.

“It hasn’t been knee-jerk reactions from the Fed,” Money said. “It’s been very scripted and they’ve been very minimal.”

Dave Horan, NextGear Capital’s vice president of finance, said his firm’s clients are being more selective about inventory and floor
plan purchases, but remain optimistic.

“Although rising rates cause floor plan costs to increase, our dealers expect overall used-car demand will improve as payment-conscious consumers move from new auto purchases or leases to less
expensive used vehicles,” Horan said.

Jim Neubauer, chairman of Vehicle Acceptance Corp., said the impact on dealers is determined mainly by the way their floor planner calculates rates.

VAC uses a fixed rate interest floor plan, while others offer variable interest rate contracts.

One of the biggest changes for floor planning since the last interest rate hikes is where dealers buy their vehicles. In addition to sourcing more vehicles online than from traditional sources, dealers are buying cars for a wide variety of venues, ranging from mobile sales to new Internet offerings.

For example, Money’s AFC floor plans purchases of vehicles at
ADESA auctions, Insurance Auto Auctions salvage sales, the online sales for both and on TradeRev, which offers short duration sales online.

“Sellers located long distances away, selling to unknown buyers using unique methods require that the buyer has financial credibility in order for the buyer to get the best possible price from that seller,” Neubauer said.

“The new role for floor plan companies today is providing that critical credibility, third-party underwriting and verification and credit capacity that buyers must have to be able to buy vehicles that are hundreds or even thousands of miles away, from sellers that want to be certain that they are going to get paid.”

Horan said the role of floor planners has grown in many ways.

“Today floor plan lenders are an extension of the dealership, reducing some of the burdens typically associated with flooring transportation costs or managing the title process,” he said.

With all the changes, floor planning still comes down to one goal: helping dealers stock the right inventory.

Money said right now most are doing a good job in that area, turning their vehicles quickly and keeping ahead of market changes.

This makes sense. After all, rising interest rates are a sign of economic strength, he said.

Last modified on Monday, 21 May 2018 19:55

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