Floor Plan Finance: a Worked Example

A dealer in cars, motorcycles, farm machinery or boats has to hold stock its customers can see and ride before they buy, and that stock is most of what the business owns. Funding it from an overdraft would leave the lender lending against a pool whose contents change daily. Floor plan finance ties each advance to a single identified unit, usually by its serial number, so the lender knows at any moment which unit each dollar is in and what has to be repaid when it leaves the yard.

The financier is often a manufacturer's own finance company, which uses the facility to help its dealers carry its products, and sometimes a bank or independent lender. In the UK the same facility is usually called stocking finance.

Every term is the facility's own. New units are often funded at or close to their full wholesale cost, used and trade-in units at a lower share of an assessed value. The dealer repays a unit's advance within a short period after the sale, often a few business days. A unit that stays on the yard starts to attract curtailments after an agreed number of days, and must be repaid in full by a final date whether it has sold or not. The curtailment schedule is how the lender keeps its advance from outgrowing what an ageing unit would fetch, and it is how slow-moving stock turns into a cash demand on the dealer.

The lender audits the stock, typically by sending an auditor to the yard, or increasingly by asking the dealer to photograph or scan each unit's serial number. Every funded unit should be on the yard, or accounted for by a document: a demonstrator signed out, a unit at a body shop, or a sale whose repayment is due within the agreed period.

A motorcycle and quad-bike dealer in Australia, constructed for this page like every figure in it, has a floor plan limit of US$5.0m. New units are funded at 100% of wholesale cost; each sale must be repaid within two business days; units unsold at 150 days pay a curtailment of 10% of the advance, and 10% each month after. Those terms are the example's. The lender's auditor arrives unannounced, in US$000:

The four bikes were sold over the previous three weeks. Their buyers paid US$68,000 in full, and the dealer used the money to meet payroll. Those units have been sold out of trust: the collateral has gone, and so has the cash it became. The dealer now owes US$150,300 at once, while the stock that could fund it, the thirty-five aged units, is the stock that sells least readily. The lender's next questions are whether the four sales were the first, which units on the yard are funded twice, and whether a floor plan with another financier exists.

The buyers keep their bikes. A customer who buys from a dealer in the ordinary course of its business generally takes the unit free of the financier's interest, under section 46 of the Australian Personal Property Securities Act 2009 and section 53 of the New Zealand Act of 1999, unless the buyer knows the sale breaches the security agreement; UK law has its own rules protecting buyers from dealers in possession. The lender's claim is against the dealer.

Many floor plans are written as a bailment: the financier owns each unit and the dealer holds it until sale. In New Zealand and Australia that ownership does not keep the financier outside the personal property securities regime. Both Acts look at substance rather than title, and a bailment under which the dealer must pay for each unit when it sells, or by a final date, is generally a security interest in substance. It is rarely a PPS lease: the term must exceed one year in New Zealand and, since 2017, two years in Australia. A commercial consignment needs both parties to deal in goods of that kind. Either way, the financier registers on the PPSR.

The consequences of not registering differ. In Australia, an unperfected security interest vests in the dealer if it goes into liquidation, administration or a deed of company arrangement (section 267), and the financier's units become part of the dealer's estate. New Zealand has no such vesting rule, but in both countries an unregistered interest loses priority to a registered one, typically the dealer's bank's general security. Floor plan financiers commonly register as a purchase money security interest, which, registered within the time the Act allows for inventory, can rank ahead of that earlier security. In the UK, stocking plans are commonly built on the funder keeping title. Retained title is not a charge, so nothing is registered at Companies House; if a court read the arrangement as a charge, it would be void against a liquidator or administrator unless registered within 21 days.

For the dealer's bank, the floor plan is the facility it does not provide but must read. It ranks ahead on the stock, its curtailments are a call on the dealer's cash that arrives when sales slow, and a floor plan lender that suspends funding can stop the dealership from trading. A bank lending to a dealer reads the floor plan's terms, its ageing report and the latest audit before it reads its own overdraft.

For the floor plan lender, the decision sits in the audits. Aged stock is a pricing and curtailment problem; a sold-out-of-trust unit is a question about the dealer's honesty and its cash. One late repayment explained by a settlement delay is ordinary. A pattern of them, repayments made only when an audit is announced, or units missing without documents, usually brings more frequent audits, a lower limit, or the end of new funding.

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