Floor Plan Financing Explained: How Dealers Finance Inventory

By MercFinancial · Published 2026-10-21

Floor plan financing is a revolving line that advances against each vehicle a dealer buys, holds the title, charges interest and per-unit fees, and is repaid within days of the retail sale. How curtailments, audits and costs work.

Floor plan financing is a revolving line of credit that pays for each vehicle a dealer buys, holds the title or manufacturer's certificate of origin until the unit sells, and is repaid from the sale proceeds within a few days of delivery. It is how nearly every dealership, from a franchised store to a 20-car independent lot, carries inventory it could not pay cash for. The line is offered by manufacturer-affiliated finance companies for new units, by independent floor plan companies for used inventory, and by some banks for established dealers.

This guide explains the mechanics: how an advance is made, what curtailments and audits are, what the fees add up to, the difference between captive and independent floor plans, and what a sold-out-of-trust event means for the line. It closes with an illustrative cost on one unit held 60 days and where MercFinancial fits in dealer funding for a lot that needs a line, an increase or a second provider.

A floor plan is not a loan against the dealership. It is a loan against each car, one unit at a time.

How a floor plan advance works, unit by unit

The dealer buys a unit at auction, from a wholesaler or on trade, and asks the floor plan provider to floor it. The provider advances the purchase price, or an agreed share of it, directly to the seller, takes the title or certificate of origin, and books the unit on the line at that advance. From that day the unit accrues interest daily, plus whatever flat fees the agreement sets per unit.

When the dealer retails the car, the agreement requires payoff of that unit's advance within a short window, commonly measured in days from the sale or from receipt of funds. The provider releases the title to the dealer, who delivers it to the customer or the customer's lender. Availability on the line goes back up by the amount repaid.

Two points separate a floor plan from an ordinary line of credit. The collateral is specific: each advance is secured by one identified vehicle under a UCC Article 9 inventory security interest and by possession of its title. And repayment is event-driven: the sale, not a calendar date, triggers the payoff. A dealer's capacity is measured in units and turn, not in a loan balance. How that capacity sits beside the dealer's other borrowing is covered in used car dealer business loans.

Curtailments, aging and audits

A floor plan provider makes money while a unit turns and loses money while it sits, because a car that does not sell is a car losing value against a fixed advance. Curtailments are how the provider manages that. A curtailment is a scheduled principal paydown on a unit that has reached a set age, commonly starting somewhere between 60 and 120 days on the line, with further paydowns at later intervals and a hard date by which the unit must be paid off in full. The dealer funds curtailments from cash, which is why a slow month on the lot becomes a cash problem before it becomes a sales problem.

Audits are the provider's check that the cars floored are the cars on the lot. An auditor visits, often unannounced, walks the inventory against the line, and asks for proof of payoff or location on any unit that is not present. Units at a body shop, out on a test drive or at a second location need documentation. A missing unit with no sale recorded is the start of a sold-out-of-trust finding.

Between audits, providers expect sales reported promptly and an inventory ledger that ties every unit to a stock number, a purchase invoice, a title status and a floor plan status. A dealer who keeps that ledger current has nothing to fear from an audit and an easier conversation about a line increase.

What a floor plan costs: interest, fees and the line's terms

The cost of a floor plan has several parts, and quoting only the interest rate understates it. Interest accrues daily on the advance, usually at a floating rate over a published index. Flat fees are charged per unit at flooring, at each curtailment, at payoff, and for title handling or late payoff. Some providers add an annual line fee. Captive programs for new units sometimes subsidize or waive interest for an initial period, which changes the arithmetic for a franchised dealer.

The lesson in the example is that carrying cost compounds with age. The same unit at 120 days has cost twice the interest, triggered a curtailment and been marked down on the lot. Dealers who price a unit to turn, rather than holding out for a higher gross, generally come out ahead on the line.

Captive versus independent floor plans

Many franchised dealers run both: a captive line for new units and an independent line for used. Independent dealers often add a second provider once they reach size, which spreads the line-limit risk and gives them a place to floor units when one line is full. Banks write floor plans for larger, established dealers, usually alongside the real estate loan, and rarely for a lot under a few years old. RV, boat and powersports dealers see a third variant, the manufacturer-arranged line with a repurchase agreement, covered in RV, boat and powersports dealer financing.

Sold out of trust and the other ways a floor plan line is lost

Sold out of trust, SOT in the trade, means a floored unit was sold and the advance was not paid off inside the agreement's window. The provider treats it as a default on the line, not a late payment on one car, because the collateral is gone and the proceeds went elsewhere. A first, small SOT with an immediate cure and a written explanation is survivable with many providers. A pattern ends the relationship, triggers a demand for payoff of every unit, and follows the dealer through trade references.

The other ways a line is lost are quieter. Repeated audit discrepancies, units that cannot be located, titles that cannot be produced, curtailments paid late, a lapse in the dealer bond or license, and a personal credit event for the guarantor all give the provider the right to freeze advances or cut the limit. A dealer who sees a slow month coming does better calling the provider first.

Dealers tempted to stack revenue-based advances on a floor plan to cover curtailments should read the merchant cash advance red flags first. The daily debits land in the account the provider reads at renewal, and the money tends to fund aging inventory rather than turn.

Where MercFinancial fits

MercFinancial is a commercial funding brokerage in Houston, Texas, not a lender, and it does not write floor plans itself. What it does is read the dealer's file first, the license, the floor plan statements, the inventory aging and the bank statements, and then identify which of the more than 160 funding sources in its network have a credit policy that allows the dealer type and the structure requested. For a dealer who needs a first line, an increase or a second provider, that means placing one file with the floor plan lenders who write that kind of lot, and placing the working capital, equipment and real estate pieces with the business funding sources that fit. Offers are compared on cost, curtailment schedule and covenants, and when nothing fits, the answer is a plain no. Availability depends on the funding source.

Frequently Asked Questions

How does floor plan financing work?

A floor plan provider pays for each vehicle a dealer buys, holds the title, and charges daily interest plus per-unit fees until the car sells. When the unit retails, the dealer pays off that advance inside a short window and the title is released. The line revolves, curtailments require principal paydowns on aging units, and periodic audits confirm the floored cars are on the lot.

What is a curtailment on a floor plan?

A curtailment is a scheduled partial paydown of the advance on a unit that has aged past a set point on the line, commonly starting between 60 and 120 days, with later paydowns and a final payoff date. It protects the provider against a car losing value while the advance stays fixed. Curtailments are paid from the dealer's cash, which is why aging inventory becomes a cash problem.

What does sold out of trust mean?

Sold out of trust means a dealer sold a floored vehicle and did not pay off the floor plan advance within the agreement's window. Providers treat it as a default on the whole line, because the collateral is gone. A single small event cured at once and explained in writing can be survivable. A pattern ends the line and follows the dealer through trade references.

Can a new dealer get floor plan financing?

Usually yes, through an independent floor plan company, on a modest line that grows with clean payoff history. The provider will want the state dealer license, the surety bond, a lot with a lease or deed, and a guarantor whose credit it accepts. Banks generally wait for two or more years of history and a real estate relationship. A captive line requires a manufacturer franchise.

How much does floor plan financing cost?

It depends on the provider and the dealer, and it is more than the interest rate. Interest accrues daily on each advance, usually floating over an index, plus flat fees per unit at flooring, curtailment, payoff and title handling, and sometimes annual or audit fees. Turn matters most: a unit held twice as long costs twice the interest and triggers a curtailment. Rates and fees are set by the funding source.

MercFinancial is a commercial funding brokerage in Houston, Texas. MercFinancial is a broker, not a lender: every loan is made by a third-party funding source, every request is subject to that source's underwriting and credit approval, and loan amounts, advance rates, interest rates, terms, fees, collateral and guaranty requirements vary by funding source and borrower and are not guaranteed. Nothing here is a commitment to lend or an offer of credit, and financing is for business purposes only. Any example in this guide is hypothetical and illustrative; actual terms and outcomes vary. Vehicle dealers are licensed and bonded by each state and, when they finance customers, are subject to federal and state consumer-credit law; financing availability depends on the funding source's policies. This guide is educational only and is not legal, tax, accounting or investment advice.