Cash flow management for RV dealerships: Floor plan financing interest strategies

This article was originally published in the RV Executive Today June 2024 issue.

Effective working capital management is critical for RV dealers. With many dealers experiencing a drastic change in interest rates and inventory levels, it’s a good time to evaluate current cash flow management strategies and look for improvement opportunities.

Explore how RV dealers can use floor plan financing interest strategies to address cash flow challenges and prepare for future needs.

Floor plan financing interest strategies

Inventory management is ultimately an exercise in cash management, and the current economic environment has brought high floor plan financing interest rates combined with slow-moving inventory.

Since dealers have limited control over their floor plan rate and the RV market, many are looking for ways to help mitigate the effects of increased interest rates and stagnant inventory.

For dealers who have a surplus of cash to invest, or have excess cash sitting in the dealership, flooring their own inventory may be a solution. This is typically done through a loan from the dealer to the dealership. The dealer makes a loan to the dealership at a rate similar to their current floor plan rate. The dealership then uses those funds to pay down the flooring line. Rather than paying floor plan interest to the bank, the dealership pays floor plan interest directly to the dealer.

This strategy provides low-risk benefit and flexibility for the dealer:

• The dealer can choose to loan enough to floor just a portion of or all the inventory.
• If the dealer needs access to the cash, the dealership can floor the units with the bank and pay down the loan.
• Creates cash flow in the form of interest payments to the dealer.
• Note that related party loan interest rates must be at least the applicable federal rate (AFRs) as published by the IRS.

If the dealership is holding excess cash it can use to pay down flooring without a loan from the dealer, it’s important to consider the amount of flooring interest not being paid on inventory. Often pay plans are connected to net income. If the dealership is getting the benefit of not paying flooring interest because the dealer has left excess cash in the dealership, the employees may also be getting the unintended benefit of the reduction in expenses. This can be handled by calculating the amount of floor plan interest that would have been paid if the units had been floored and factoring that amount into the pay plan calculation. Consult your employment law advisor before making changes to pay plans.