Dealerships typically finance their inventory through a combination of manufacturer financing, bank loans, and lines of credit. Manufacturer financing is often the primary source of financing for new vehicle inventory, with banks and other lenders providing financing for used vehicle inventory.
This type of financing allows dealerships to borrow money to purchase vehicles from manufacturers and pay back the loan as they sell the vehicles.
Floorplan financing could also be adapted to car subscription services by allowing dealerships to borrow money to acquire vehicles for their subscription fleets. This would provide the necessary capital to acquire a large fleet of vehicles upfront, which is typically required for a successful car subscription service. As subscribers sign up for the service and begin using the vehicles, the dealership would pay back the loan through their subscription revenue.
Benefits of Floorplan Financing
One benefit of floorplan financing is that it provides dealerships with a flexible financing option that can be tailored to their specific needs. Dealerships can choose the type of financing that works best for their business, whether it is a revolving line of credit or a more traditional term loan.
Another benefit of floorplan financing is that it allows dealerships to quickly adjust their inventory based on changes in demand. For example, if demand for a particular vehicle model decreases, the dealership can quickly dispose the vehicle and use the funds to acquire a more popular model.
Risks of Floorplan Financing
Floorplan financing is not structured toward subscription businesses in the same way it is for traditional dealership environments and could limit the growth potential of subscription providers.
There are limitations to the amount of debt that can be incurred under a floorplan financing agreement, which could be problematic for subscription businesses that require a much larger fleet of vehicles to meet customer demand and grow the number of vehicles being utilised on subscription.
In a traditional dealership environment, the dealership can easily replenish their inventory within the limitations of their floorplan capacity. However, for a subscription business, it may be necessary to acquire a larger number of vehicles than the debt ceiling allows. This could mean that the dealership would need to seek alternative financing sources or reduce the size of their subscription service.
Another potential issue with floorplan financing for subscription businesses is that it may require a larger down payment and higher interest rates than other financing options. This could make it more difficult for startups and smaller companies to secure the necessary financing to launch and grow their subscription services.
Adapting Floorplan Financing for Car Subscription
Automakers are aware of the growing interest in using floorplan financing for car subscription fleets, and some have started to respond to this trend by offering their own financing solutions specifically designed for car subscription services.
These financial products allow subscription providers to increase their floorplan capacity by taking into consideration the revenue being generated by these vehicles on subscription.
For example, some financial institutions offer a type of floorplan financing called subscription fleet financing. This type of financing is designed specifically for car subscription services and takes into consideration the recurring revenue generated by the subscription service. Instead of focusing solely on the value of the vehicles as collateral, subscription fleet financing looks at the ongoing revenue generated by the vehicles in the fleet.
Under this model, the subscription provider can borrow against the future revenue generated by the subscription service, allowing them to increase their floorplan capacity without exceeding the debt ceiling. This can be a significant advantage for subscription providers, as it allows them to acquire a larger fleet of vehicles and meet the needs of their customers without incurring excessive debt.
Subscription fleet financing can also be structured in a way that reduces the risk for the financial institution. For example, the financing may be secured against the subscription revenue, and the financial institution may have the right to repossess the vehicles if the subscription service is not generating sufficient revenue.