How Do Car Dealers Make Money Below Invoice?

Published: 22nd February 2010
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Well... the short answer is in a variety of different ways.

Now don't take this wrong and think that ah ha... another way to scam and separate the most hard earned money they can from their customers.

Not in this case anyway.

All businesses must have a variety of different revenue sources if they are to prosper and pay their employees.

Let's take a look at an aspect of a car dealer's business known in the industry as floorplan.

Floor plan is not something that is generally known to the public simply because it doesn't directly affect the cost of the car but it does affect the profitability of the dealership.

A lot of people wonder how in world can a car dealership make any profit when they are claiming that they are selling at or below their cost?

First of all a dealer's actual invoice or dead cost is a rather nebulous figure to arrive at... but let's stick with floor plan.

By in large, the majority of dealers to participate in some type of floorplan with their bank. This simply means they carry a mortgage or credit account against their inventory, meaning they borrow money to provide the inventory that sits on their car lot... and this is a quite normal aspect of the cost of doing business. It's simply a rotating effect where one car is paid off when it's sold and the next car comes off the transport truck and is added to the dealer's floorplan.

Depending upon the agreement the dealer or ownership group has with their bank, the bank will floorplan the inventory for a period of time for the dealer at no cost. Typically there is a period of between 30 and days of no interest charges against the dealer's inventory once it hits the ground.

Now... if the car is sold during the free period, the dealer will get a credit for the difference in days. For example if the dealer is on a 90 day floorplan and they sell a car within 10 days of floorplanning it, then the dealer gets 80 days of credit... this credit is as good as cash because at the end of each of the billing cycles, the dealer will get the credit days back in the form of a check.

Starting to see the revenue opportunity here?

You can probably see that it behooves the dealer to not only tightly manage the inventory, but to turn it over (sell it) quickly. The more efficiently a dealer can do this, the bigger the check they get back each month that will add nicely to their profitability.

I mean do the math here. Just to make the math very easy... let's say a dealer pays $5 per day in interest charges that a car is floorplanned. 50 days of credit back to the dealer would be $250.

Since a dealer can carry anywhere from a couple hundred cars (larger dealers carrying over a thousand cars) in their floorplanned inventory... you can see that if they effectively manage and turn their inventory, they can get a nice check kicked back to them each and every month.

Cars that sit on the lot beyond the floorplan grace period begin costing the dealer money in terms of interest payments to the bank. This is why dealers like to move those cars that are on the brink of costing them more money.

So there you go... that's the way that car dealers who participate in floorplanning with their financial institute can sell you cars below what the cost on the invoice actually is.


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