(Used Car News recently asked several floor plan executives to share their views on the current state of the industry. Jim Money is the president of Automotive Finance Corp., the floor plan arm of KAR Auctions Services Inc.  Justin Makinson is the senior director of financial planning and analysis at NextGear Capital. Jim Neubauer is chairman of Vehicle Acceptance Corp.)

UCN: What is the current demand from dealers?

Money: We’re still working through tax sale season and we should have a better idea of demand as the summer comes to an end.

This is something that KAR chief economist Tom Kontos reports during his monthly updates. Kontos most recently reported that as new vehicle prices and payments are reaching affordability limits for many consumers and an abundance of nearly new off-lease units hit the market, he is seeing a strong used car market.

At this time, AFC’s customers, independent dealers, seem to be experiencing a healthy market.

Makinson: So far this year, demand from our dealers remains strong as they continue to experience elevated retail sales in the used market. The economists at Cox Automotive, our parent company, are projecting that used car sales in the U.S. will reach 39.5 million for a second-straight year, so overall demand shows no signs of letting up this year.

Neubauer: For anyone that has been in the used-car industry for a while, it is apparent today’s marketplace is pretty darn good by most measures. This includes the floor plan lending environment. While there are areas in floor plan lending that need improvement, unrealized business goals and most certainly disappointments, as a general observation we can agree the lending environment is positive.

The marketplace has an ample supply of floor plan credit through many well-established providers. Each provider is actively looking for new business and has adequate capacity to meet the demand of the continually increasing unit count volumes.  The wholesale unit count of used vehicle transactions will most likely be another record year.

How have last year’s interest rate hikes affected your business?

Money: We have no impact to report. In fact, AFC sales were up modestly in 2018.

Makinson: The interest rate increases are certainly a factor across the automotive industry as both floor plan providers and their dealer clients are impacted by the rising costs. These higher interest rates also make it more expensive for the consumer to borrow money for a vehicle purchase.

Our clients’ core inventory is used vehicles 4 to 9 years old – a segment that has experienced a significant shortage of supply over the last several years.  However, 2014 and 2015 models are now entering the 4-9 year old space, offering a solid supply and a desirable mix of SUVs and CUVs that are currently attractive to consumers that gives our dealers an even better selection of inventory.

Most of our dealers also are smaller, independent business owners. They have a resiliency and entrepreneurial spirit to quickly adjust to market shifts, and this year is turning out to be no different. We wouldn’t want to downplay the importance of interest rates, but so far, our dealers appear to be adjusting and capitalizing on the positive momentum.

Neubauer: While interest rates did move around some last year, they appear to be stable at the moment. Access to the capital markets for the well-established floor plan providers remains readily available.  Actual floor plan costs to the dealer have not changed much over the past year. 

The change in interest rates has not changed the total cost of the service much, given the short duration of the period outstanding.

UCN: What is your expectation for demand?

Money: Typically we see a higher demand during the tax season, but this year it was moderate to little demand. Should new car prices continue to rise, we will see an increase in demand for the used car industry.

Makinson: NextGear Capital sees demand staying at historically high levels for used cars throughout the year.

We’re seeing dealers continue to utilize floor planning for their inventory purchases to meet elevated consumer demand for used cars. Our dealers also are tapping into new technologies, like NextGear Capital’s Rapid Pay, that enable them to maximize their floor plan needs by getting funding faster with less hassle.

Neubauer: As the wholesale marketplace moves to an even larger number of digital transactions, the need for floor plan services becomes even greater.

While the buyer may be buying in front of a computer screen rather than in the lane, the seller continues to demand certainty of payment.  The floor plan provider being the “banker” of the transaction provides a critical assurance of payment to the seller.  Transporting the unit greater distances further injects larger transaction cost risks and a guarantee of payment to the seller is critical before they are going to let that vehicle travel long distances.

What is your expectation for interest rates?

Money: I don’t anticipate any interest rate changes in 2019. Should there be rate changes, I am confident that the impact would be minimal for our customer base and the used-car industry.

Makinson: It’s always difficult to predict exactly where rates will move, but Cox Automotive economists see the Fed being more patient this year in raising rates.

Neubauer: Technology advancements in floor plan lending are revolutionizing things like lot audits and funds transferring. As these new technology advancements reduce the floor plan company’s operating costs, floor plan customers can expect lower fees and therefore, savings in the future.