Floor plan financing is a loan that pays for the cars or machines on a dealer's floor until each one is sold. It is also called inventory financing or stock finance. In India, banks and the finance arms of car makers often call it a trade advance or dealer finance.
Here is why it is needed. A car dealer must keep many cars in the showroom, in different models and colours, so that buyers can see them. The car maker wants to be paid when it delivers the cars. But the dealer gets its money only when a buyer pays, which may be weeks later.
The lender pays the car maker for each car as it is delivered. The dealer pays interest every day on each car that is still unsold. When a car is sold, the dealer repays the money for that one car within a few days. In India, each car's amount also has a due date, usually 30 to 90 days after the lender paid for it, even if the car is still unsold. So the loan grows when new stock arrives and shrinks as cars are sold.
The lender needs to know where every car is, because each one is its security. It sends staff to count the cars, which is called a stock audit. The dealer management system (DMS) tells the lender's software when each car is sold. If a car is sold but the dealer does not repay, the lender finds out from this data or from the audit.
The same loan is used for used cars. In the United States, dealers buy used cars at an online car auction, and the auction company itself lends them the money to pay for the cars they win.
Floor plan financing is usually managed in lease management software, alongside leases. It is a form of working capital: it funds the stock between buying it and selling it.