Why Do Car Dealers Get Paid By The Manufacturers?

A car manufacturer pays a car dealer money, to stock their inventory.

Since having cars on their lot is something that the cars dealers need to do in order to sell cars and make money, why would a car manufacturer ever pay a car dealer to do something they need to do anyway?

The answer is that most car dealers need to borrow money to put cars on their lots. Think about it this way: if a car dealer has 200 cars, and the cars cost an average of about 20,000 each, that’s 4 million in inventory. Car Dealers, like most other businesses, don’t have that kind of cash flow, so they need to borrow the money to pay for every car on the lot.

The interest on borrowing 4 million euro results in some expensive interest payments. These interest payments are called “floorplan” and will add up to lot of money in no time at all. The interest on each vehicle in a car dealer’s inventory will be anywhere up to 20 a day, depending on the interest rate. Added up, it is very expensive to stock inventory. In today’s car business, many dealers can not afford such an expense and, if not for holdback, they would decide not to stock very many vehicles. This in turn would probably reduce sales.

About thirty or forty years ago, manufacturers decided to start paying dealers “floorplan assistance” so that they could stock more cars. They figured that stocking the lots help dealers sell more cars, and in effect allows manufacturers to sell more cars. Currently, dealers get back 2-3% of the cost of each vehicle from the manufacturer when they sell a car to offset the cost of their inventory. This rebate of 2-3% is known as “holdback.”

Holdback is an essential part of income for most car dealers. There are some dealers, however, with such high turnaround that holdback becomes profit for them. That is, they actually make a profit from the interest subsidy because they sell their inventory so fast. When this does happen, you shouldn’t expect that a dealer will share any of their holdback profit with you. Since most dealers are already operating with a small profit margin, they feel that any profit from holdback is theirs. Most customers don’t ask for or even know about holdback anyway.

If you’re trying to get the best deal, follow our standard car negotiating advice, and also remember to go online and get multiple quotes. If there’s a vehicle the dealer really wants to sell and you’re interested in it, you might be able to convince them to sell it for less than invoice. Even if they don’t make a profit, they’ll still have their holdback money, and you would have gotten the vehicle at a bargain price.

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