Home » Here’s What Capital One Exiting Floor Plan Financing Could Mean For The Car Market

Here’s What Capital One Exiting Floor Plan Financing Could Mean For The Car Market

Capital One Floor Plan Topshot
ADVERTISEMENT

It’s been a weird few years for the car market, and things could get weirder still. As first reported by Twitter user CarDealershipGuy and now confirmed by Automotive News reports, Capital One is out of the dealer “floor plan financing” business, and while I realize this may not sound like the sexiest of topics, it could have some interesting effects on the car market. In case you think of homes when you think of the term “floor plan,” allow me to introduce the way dealers are able to hold massive inventory.

Honda Dealer Average New Vehicle Transaction Price
Photo credit: yonkershonda licensed under CC BY-SA 2.0

Here’s a little secret: Dealerships usually don’t pay for every car on their lots, just like how consumers don’t usually buy cars outright. Instead, they take advantage of a form of financing called floor plan financing. Companies that offer this sort of financing give dealers lines of credit to buy vehicles with an interest-free period. If a car on floor plan financing sells within that period, the dealer takes the customer’s money or the customer’s lender’s money and uses some of it to pay off the line of credit. If a car doesn’t sell within that period, the dealership gets charged what has usually been a small fee since credit was nearly free for a decade. This allows a dealership to have very little money tied up in inventory despite amassing a huge selection of cars.

Vidframe Min Top
Vidframe Min Bottom
Car Dealership
Photo credit: “Row of Cars at a Car Dealership” by everycar_listed_photos is marked with CC BY-SA 2.0.

So, that’s how floor plan financing works, but what does Capital One exiting the business mean? Well, Capital One is far from the only company offering floor plan financing, with Automotive News noting that “does not seem to signal a trend in lenders exiting this business.” Plus, floor plan financing doesn’t seem to be a huge part of Capital One’s business. From the news site:

In a follow up phone call, a Capital One spokesperson said floorplan lending comprised about 1 percent of its commercial bank business and was “not core to the long-term priorities of our commercial bank.”

That being said, Capital One is exiting the business at a time of rising costs. If you financed a new vehicle at zero percent over the past decade or so, there’s a very good chance the manufacturer subsidized the loan costs as an incentive. Automakers have historically done the same sort of thing for new car dealerships’ floor plan financing, allowing them to take on more and more new car inventory by helping cover some of the interest costs associated with aging inventory. However, thanks to a decade of cheap credit, floor plan incentives often resulted in profit because the incentives the manufacturers were offering often exceeded the low interest costs of having a few cars on floor plan financing sit around for a while. With higher interest rates and less competition in the floor plan financing space, those profits could flip to costs, and costs are inevitably passed on to consumers in our economy of perpetual growth.

Car Dealership On Western Ave 2
“Car Dealership on Western Ave” by David Hilowitz is licensed under CC BY 2.0.

The big potential equalizer here is lean inventory strategies. General Motors is already taking action to keep on-the-lot supply lower than it was before the pandemic, and many dealers are still working through an order backlog that left lots looking sparse. If a vehicle already has a buyer before it reaches the dealership, floor plan costs are kept low. This could theoretically apply to both new and used vehicles, as used vehicles can be purchased for clients looking for particular vehicles.

ADVERTISEMENT
Nalley Nissan Of Atlanta 07 Source Capital One Floor Plan
Photo credit: Nissan

So, what happens now to inventory? We had a chat with CarDealershipGuy, the anonymous car sales CEO who broke the news, to gain some insight. While new car dealerships aren’t likely to see huge changes, used car dealerships could be in for a world of hurt. According to him, dealerships that use Capital One for floor plan financing only have 90 days to find a new lender before things get very real.

They’re pretty concerned, as I would be as well. Your business is on the line, you have tons of used car inventory, and you need to find another bank in 90 days. As I’m sure you know, doing any type of deal under time pressure is never good or advantageous. This isn’t like an Ally pulling out, that would be a disaster clearly, that just wouldn’t make any sense, but it’s still something not to gloss over. It’s still a big deal in the industry.

I think the reality is that if anyone can’t get that refinanced, they’d have a tough situation and have no choice but to liquidate that inventory or pay cash, and most dealerships don’t have cash like that to pay off inventory. I hope we don’t get to that situation, but if you can’t re-fi in time, you’re in a bit of a pickle to say the least.

So how hard is it to find another floor plan company? CarDealershipGuy said, “It’s not a slam-dunk to run and get another floorplan like that,” which means it’s tougher than most people outside of the industry think. Although CarDealershipGuy stated that floorplanning companies have reached out to acquire new clients after he broke the news, there’s still a very real chance of some dealerships getting lost in the margins. Perhaps more importantly, Capital One pulling out of floor plan financing is indicative of greater instability caused by interest rate hikes. CarDealershipGuy has a great explanation on why credit tightening is hitting used car dealers hard, including his own businesses.

Our inquiries are up 50 percent month-over-month from February to March. It’s the conversions that got obliterated for various reasons, the biggest being affordability. The prices of used cars coupled with the interest rates, it’s a tough sell because people can’t afford it. Ultimately, it results in some form of margin compression. They have to discount the car even more or maybe you’re carrying the car longer on floorplan. One way or another, that affects margin compression. More importantly, it results in reduced volume.

Used Car Dealership In Santiago, Chile
Photo credit: order_242, CC BY-SA 2.0

While CarDealershipGuy notes that some specialty pockets of the used car market are thriving, they aren’t indicative of the market as a whole. As the man himself put it, “The average used car is not $30-, $40-, $50,000. The average used car is $25,000.” Apparently cars in that $15,000 to $25,000 used car heartland aren’t just scarce, they’re growing older. Used car wholesale values are still way up from pre-pandemic levels, to the point where $15,000 doesn’t always get you a three-to-five-year-old reliable used car. You might be looking at something seven, eight, possibly ten years old for that sort of money depending on the segment you’re shopping.

If you’re looking well outside of the scope of the typical used car buyer, there may be deals to be had as dealers discount inventory to keep things moving. Likewise, there may also be deals coming up if some dealerships can’t find alternative floor plan lenders. However, don’t expect to get financing if you’re near-prime or sub-prime and don’t expect things to go back to normal anytime soon. Thanks to leasing falling out of favor and production constraints over the past three years, we could be in this used car bubble for years to come.

(Lead photo credit: Nissan)

ADVERTISEMENT

Support our mission of championing car culture by becoming an Official Autopian Member.

Relatedbar

Got a hot tip? Send it to us here. Or check out the stories on our homepage.

Share on facebook
Facebook
Share on whatsapp
WhatsApp
Share on twitter
Twitter
Share on linkedin
LinkedIn
Share on reddit
Reddit
Subscribe
Notify of
23 Comments
Inline Feedbacks
View all comments
Don Mynack
Don Mynack
10 months ago

Another story from this week that I think might be more important is that Capital One is (rumored to be) refusing to finance car loans over $25K to consumers.

Manwich Sandwich
Manwich Sandwich
10 months ago

No sympathy from me. They can supply their own credit from all those market adjustment fees they’ve been slapping on vehicles over the past couple of years.

Ranwhenparked
Ranwhenparked
10 months ago

There are options for floorplan/lines of credit for dealers to either increase their line or apply for a new one – AFC, Nextgear, etc.

With sales and inventory being what they are, the dealers personal credit will play a stronger role in the rates and terms they may qualify for based up on the risk the lenders are able to take.

Will this create additional price pain for consumers – yes.

Eva
Eva
10 months ago

All of this bodes well with the plan to electrify half of the American auto fleet sales by 2030 huh.

James Duffy
James Duffy
10 months ago

If consumers could purchase vehicles directly from the manufacturer there would be no need for the added expense of floor plan financing.

Thomas Ogle
Thomas Ogle
10 months ago
Reply to  James Duffy

Manufacturers really have no interest in selling cars themselves. Like you, I would like to by pass the dealer, and I am a tiny one man show used car dealer, but in reality, most people need financing, test drives, trade in values. The manufacturer also gets paid as soon as the car is built, even before the car arrives at the dealer, so they have no interest in paying interest on the car or giving up the interest.

Palmetto Ranger
Palmetto Ranger
10 months ago

Is Capital One really exiting the market in 90 days? Even assuming the agreements all let them terminate with 90 days notice, that seems like an odd way to approach it. The simpler way to do it is to tell dealers their agreements will not get renewed and run them down while not taking on new customers. Seems to accomplish the bank’s goal without putting the dealers in a huge bind.

Thomas Benham
Thomas Benham
10 months ago

Knowing sleazeball bankers, the terms probably say they can call in the debt at something like 28 days so to them 90 is being generous.

Palmetto Ranger
Palmetto Ranger
10 months ago
Reply to  Thomas Benham

But why though? They are just creating losses on themselves if they force the dealer to fire sale cars to pay down the loan. They would be creating more work for themselves in chasing the deficiencies. It would make more sense just to wind things down. Lay off sales staff since you are not taking on new business and then shrink the loan officer pool as the loans expire. Maybe they have a competitor lined up to take over their book of business? Just very strange to do it so abruptly.

Last edited 10 months ago by Palmetto Ranger
Thomas Ogle
Thomas Ogle
10 months ago

I am curious what happens if a dealer can not get another floor plan provider. At that point the cars go back to the auction and get ran as basically repos. They will have to eat the difference in amount floorplanned and amount the car sells for.

Taargus Taargus
Taargus Taargus
10 months ago

That picture of the CDJR lot with the pre-facelift Cherokees makes me laugh now. You guys manage to squeeze that one in on every single story that involves car dealers and inventory. I hope you’re still using it 20 years from now.

Chris Stevenson
Chris Stevenson
10 months ago

Same with the car dealership on Western Ave. That’s Chicago, I know the exact spot. I hope both pictures are used forever.

Gubbin
Gubbin
10 months ago

Ukrainian Village, looks like an interesting place to visit.

Drive By Commenter
Drive By Commenter
10 months ago

Sounds like buyers in the mindset of “always buy a 3-5 year old used car” are going to be in for a rough time.

Gubbin
Gubbin
10 months ago

On the other hand, “1998 wasn’t that long ago” buyers like me are sitting pretty. 🙂

Ben
Ben
10 months ago

Honestly, it’s been that way for a while. 3 year old used cars like my parents bought when I was a kid haven’t been good deal for many years, probably since Cash for Clunkers when so many used cars were removed from the market. I suspect a lot of people are so dogmatic about their car buying (see also any discussion about paying cash vs. financing) that they continued to look for 3 year old cars even when they cost as much as a new one.

Mr Sarcastic
Mr Sarcastic
10 months ago

Screw this how dies capital one make money with 0 percent financing? They have to be making money somewhere?

Whatsanautopian
Whatsanautopian
10 months ago
Reply to  Mr Sarcastic

“the answer is simple: volume.” https://m.youtube.com/watch?v=KodqIPMbyUg

Steve Lee
Steve Lee
10 months ago
Reply to  Mr Sarcastic

I’m guessing flat service fees.

Fix It Again Tony
Fix It Again Tony
10 months ago
Reply to  Mr Sarcastic

Maybe not making money is why they’re exiting the business.

TXJeepGuy
TXJeepGuy
10 months ago

thats not the business they’re exiting.

James Duffy
James Duffy
10 months ago
Reply to  Mr Sarcastic

Screw this how dies capital one make money with 0 percent financing?

They don’t. The 0% (or rates below market) finance deals are always extended by a captive finance firm aligned with the manufacturer. Money moves around in the background to offset the cost of the financing.

Ranwhenparked
Ranwhenparked
10 months ago
Reply to  Mr Sarcastic

They make money helping to push the metal, not everyone will qualify, but it gets folks in the door for more finance opportunities.

23
0
Would love your thoughts, please comment.x
()
x