How does floor plan financing work when you buy a dealership?

Ask a floor plan lender to set out in writing what its facility funds, such as which vehicles or equipment held for sale, and whether that stock is its security. BDC describes inventory financing as a type of short-term business financing that can help a business obtain funds to purchase goods, supplies and materials. When you buy a dealership, ask whether the lender will extend that line to you as the new owner. For the acquisition loan and the manufacturer’s role, see financing a new car dealership acquisition.

What the security looks like

BDC notes that lines of credit are often secured by inventory and accounts receivable, and that they are demand loans, meaning the financial institution can demand full repayment at any time. Ask any floor plan lender whether its line is a demand facility and what it can require after the ownership changes. BDC also says lenders might ask about your inventory turnover ratio for larger financing amounts, so be ready to explain how quickly units sell.

Why registrations matter

Section 23 of Ontario’s Personal Property Security Act says registration perfects a security interest in any type of collateral. The Act’s definition of inventory includes goods held by a person for sale or lease, and section 33(1) gives a purchase-money security interest in inventory priority over other security interests in the same collateral from the same debtor, if its conditions are met. Under section 33(1)(a) to (c), all three must be met: the interest is perfected when the debtor, or a third party at the debtor’s request, obtains possession of the inventory, whichever is earlier; before the debtor receives the inventory, written notice goes to every secured party who registered earlier a financing statement describing the collateral as, or as including, the same items or types of inventory, inventory, or accounts; and the notice states that the sender has or expects to acquire a purchase-money security interest in the debtor’s inventory, describing it by item or type. This covers Ontario only; check the Act that applies where the dealership is. Have a lawyer search registrations against the seller and the business.

Federal small business loans and inventory

Section 1(1) of the Canada Small Business Financing Regulations defines equipment to exclude inventory of the small business, except inventory leased by the borrower to its customers. Among the loan classes in section 5(1) of those Regulations, paragraph (d) covers loans to finance the purchase of intangible assets and working capital costs, and paragraph (e) covers lines of credit for working capital costs; section 5(6) bars a paragraph (d) loan from financing refundable taxes. The program’s Guidelines list inventory among working capital costs, which a CSBF term loan or line of credit can finance, subject to the borrower eligibility criteria and loan limits in section 6.1 of the Regulations. So inventory is not financed as equipment, but can count as a working capital cost. Ask a participating lender how the program would apply to your stock before you count on it.