“FLOOR PLANNING? NO WAY MAN!”

That is the reaction I get when I mention floor planning to many dealers. Usually the dealers who react this way have already tried floor planning and have had bad experiences with it. In most cases, those bad experiences occurred because the dealer did not understand how to use floor planning properly. For those who do not know what floor planning is, allow me to explain. To those who do, just twiddle your thumbs for the next paragraph.

Floor planning is a means allowing a dealer to purchase merchandise for resale and have extended terms in which to pay for that merchandise. In order for this to happen, both the dealer and the manufacturer must have a relationship established with the same floor planning company. Once those relationships are established, the dealer places his order with the manufacturer who then ships the product to the dealer. The floor planning company immediately pays the manufacturer for the goods, and the dealer repays the floor planning company. In a nutshell, that’s how it works. To simplify if further, the dealer is actually borrowing money from the floor planning company.

There are two basic floor planning programs available known as “pay as sold” and “scheduled pay”. While some dealers exclusively use only one of these programs, many dealers use both. The two programs have different characteristics, each being better suited for certain needs.

Pay as Sold Flooring

While there are several different types of “pay as sold” floor plans, most work the same. The dealer pays the floor planning company as the merchandise is sold to the consumer. This program is available only for items that are serial numbered. Serial numbers allow the floor planning company and the dealer to keep track of individual items in the paper work process. Depending on where your store is located, this program usually involves a monthly floor check.

During the floor check, the floor planning company sends a “floor checker” into the store on a monthly basis to check for items which have been sold. This floor checker will have a statement listing items from each manufacturer by model number and serial number. Anything that is on this list and missing from the dealer’s floor must be paid for immediately. Most floor planning companies require that the dealer report and pay for sold items on a weekly basis. While this “weekly reporting” sounds tedious, it is really very simple and in my opinion should be done whether the floor planning company requires it or not.

All “pay as sold” programs have a maturity date after which a dealer must begin to pay for items that are not sold. Each manufacturer individually sets this maturity date. While some manufacturers have a maturity date ranging from six to nine months, most set a maturity date of twelve months. When the maturity date is reached, the dealer must begin to pay for items which have not been sold. The amount to be paid is generally ten percent of the original invoice amount for that item per month. In the worst case scenario involving a floor plan with a maturity date of twelve months, it would take a dealer 22 months to pay for a piece of very slow moving merchandise. This is bad and can be avoided, as I will later explain.

Scheduled Pay Flooring

Through this method of flooring the dealer repays the floor plan company in installments. The term of this arrangement is usually for 6 months or 12 which means the dealer pays for the merchandise in 6 or 12 equal monthly installments. Items without serial numbers can be floor planned with this program. Some dealers prefer the “scheduled pay” to the “pay as sold” simply because it does not involve an extensive monthly floor check.

The Cost of Floor Planning

The interest rate that is charged to the dealer for floor planning is usually about 4% above the prime rate. Many manufacturers offer a free interest period ranging from 90 to 180 days. This means that there would be no interest charges to the dealer on his balance for the first 3 to 6 months of the program. But for the moment, let us assume that there is no free interest period while examining a typical pay as sold plan.

In this example a dealer has bought $10,000 in merchandise and financed it on a pay as sold program with no free interest. We will assume that the dealer has bought merchandise which he feels he will be able to sell within 10 months; a relatively easy assumption. Let’s take the worse case scenario and assume that business is so soft that the dealer manages to sell only 10% of the merchandise per month. *With the prime rate at 8 ½%, the annual interest would be 12 ½% (prime plus 4). That would make the monthly interest rate just a fraction over 1%. (12.5 divided by 12 = 1.04).

In the above example, the total interest paid for the entire transaction is $572.92, or 5.7% of the original invoice amount. If you are dealing with a manufacturer that offers a free interest period, then your interest cost becomes almost a non-issue. On a 90 days free interest contract using the same example as above, the total interest paid for the contract would be $291.67, or 2.9% of the original invoice amount. If the contract offers a free interest period of 180 days, the interest paid would be a paltry $104.17, or about 1% of the original invoice amount.

With either example, this is a small price to pay if it gives you the means to stock salable merchandise without the added strain of having to lay out capitol which you may not otherwise have access to. This is simply another example of using OTHER PEOPLE’S MONEY to your benefit.

Do you remember the last time you decided to buy a new television or computer (or whatever big-ticket item it was)? The first store you went to didn’t have it in stock but the salesman explained that he could order it and have it for you by Thursday. What did you do? You simply told the salesman that you would think about it and let him know. You then jumped into your car and drove as fast as you could to his nearest competitor and bought the item BECAUSE THEY HAD IT IN STOCK! When a person makes a decision to buy something, they want it NOW . . . not next Thursday. Floor planning will stop you from losing sales you have previously been losing as a result of not having the merchandise in stock.

Although the floor plan company will furnish you with a monthly statement, I recommend that you keep a log of floored merchandise. The log should list the date you received the merchandise, the manufacturer it came from, the model number, serial number, landed cost (cost + freight), date sold, and the date you paid for it along with the check number. A computer spread sheet will work nicely for this as will a basic printed form. I suggest you keep a separate form for each manufacturer.

It is also a good idea to identify each piece of merchandise in the store that is floor planned by doing something as simple as putting a red adhesive dot on the price tag. That way, when a floored item sales you can immediately record it in your log for payment at the end of the week.

If you choose to use a scheduled pay program, it is advisable to pay the payments ahead of schedule if your sells of the merchandise are ahead of schedule. For example, if you are set up on a twelve month scheduled pay program and you sell 25% of the merchandise in a month, send 25% of the invoice payment in. Failure to do so may result in your being out of merchandise at the end of a few months, and still owing 7 or 8 months worth of payments.

NEVER, EVER, EVER use capitol proceeds from the sale of floored merchandise to pay your other bills. Obviously it is fine to use profits from those sales as you please. Failure to pay for floored merchandise when you sell it always leads to trouble and is the most likely cause of the bad reputation which flooring has unfairly been tagged with in some dealer’s minds.

Floor plans are a wonderful thing if you are willing to take the necessary steps to keep track of your floored merchandise. Without flooring, many of the retailers in the industry would have grown much slower, if at all.

*Please note that when this article was written, the prime rate was 8 ½%. As of June 27, 2003, the prime rate was 4%. At this rate, the interest represented in the above examples would be approximately one-third less.

By Ed Rider - United Sales Associates, Inc.