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

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.

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.

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.

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.

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.

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)

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