Floor planning is a method of financing inventory purchases, where a lender pays for assets that have been ordered by a distributor or retailer, and is paid back from the proceeds from the sale of these items. The arrangement is most commonly used when large assets, such as automobiles or household appliances, are involved.
The entity at risk in this arrangement is the lender, who is relying upon the sale of the underlying assets in order to be repaid. Accordingly, the lender may demand the following:
- That all assets acquired under the floor planning arrangement be sold at a price that is no lower than its original purchase price.
- That the inventory of assets in stock is regularly counted and matched against the records of the lender.
- That the lender be repaid at once if there is any shortfall in the inventory count.
- That the loan be paid back no later than a certain date, thereby avoiding the risk of product obsolescence.
Floor planning may be a valid option when the seller of the goods does not have adequate financing to use other options.