Be very careful when obtaining Floor Plan Financing. Sometimes it is a necessary evil.
We can’t tell you how many times we have come across cases where the dealer has fallen behind on their payment obligations and it has caused big problems in the dealership. Watch this brief video to learn more.
Below is a transcript of the video:
Floor plan financing isn’t all rainbows and butterflies. It’s not all happiness. A lot of dealers get floor plan financing and they’re all excited because they’ve never seen the kind of money that the floorplan company is willing to lend, especially in a startup dealership type world. Be careful, because it’s really important to know the terms of the financing agreement because, in a lot of cases, the floorplan company basically owns the dealership. They have the right to repossess cars. They will add curtailments and fees if payments aren’t made on time, which will bury an otherwise stable dealership. Then they will go and sue the dealer for violating the agreement. Not only that, but every floorplan arrangement has a personal guarantee. Remember, we talked at the very beginning of the program about different business structures and how a registered business will protect the owners from individual liability.
Well, to get around that, the floorplan companies will have the owner sign a personal guarantee, which says that if there’s a loss relating to the floor plan arrangement, the owner agrees to pay whatever is not paid by the business, or worse yet, the owner pays instead of the business. Meaning they don’t have to first try and seek repayment from the business before going after the owner. It’s not an indemnification agreement. An indemnification agreement would be that they first try going after the business, they get a judgment against the business, and then the owner is required to pay the judgment, not in these personal guarantees. Normally in a floor plan financing personal guarantee arrangement, the floor plan company can go after the individual that signs the guarantee, whether they decide to go after the business or not. They can just skip right on to the guarantor. That’s how the guarantee works.
For anyone entering into a floor plan financing arrangement, it is critically important that the borrower, the dealer knows exactly what the terms are of the agreement and exactly what they’re getting themselves into. It’s not something to be taken lightly. It’s not something to get the documents for and just quickly scroll through to the last page and sign.
It’s a really important arrangement that can absolutely, without a doubt, make or break the success of a dealer.
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