Dealer Holdback Explained
Auto manufacturers pay dealerships money to stock their inventory. This is called holdback.
Why a does a dealership need to be paid to stock inventory, you may ask? The dealer needs to have cars on their lot in order to sell cars, so why should they be paid for something they need to do anways?
As with most other businesses, dealerships will need to borrow money in order to pay for their inventory. They need to borrow money to put cars on their lot because they don’t have the kind of cash flow it takes to buy that many cars. For instance, new cars cost an average of about $25,000. If a dealership has 200 cars, that is $5 million in inventory!
The interest on borrowing $5 million dollars 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 dealer’s inventory will be anywhere between $3 and $20 a day, depending on the interest rate. Added up, it is very expensive to stock inventory. In today’s auto 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.
Thirty or forty years ago, manufacturers, eager to sell as many cars as possible, decided that it made sense to pay dealers some “floorplan assistance” so that they would be able to stock more cars. Today, dealers receive 2-3% of the price of every vehicle back from the manufacturer when they sell the car. That money is supposed to be used to offset inventory costs.
Holdback is an essential part of income for most 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.
When you want to get the best deal on a car, remember to find multiple quotes online. You might be able to convince a dealer to sell a vehicle at less than invoice if they really want to “earn your business.” They won’t make a profit selling it below invoice price, but they still have the holdback money. Of course, if you pay less than invoice, you will get a vehicle at a bargain price.
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