What Is Dealer Holdback, Exactly?
Jason Lancaster
An auto manufacturer pays a dealership money, or holdback, to stock their inventory.
You're probably wondering why a dealership needs to be paid to stock inventory. After all, if the dealer wants to sell cars, don't they need cars on the lot? Why do they need to be paid for that?
The answer is that most dealerships need to borrow money to put cars on their lots. Think about it this way: if a dealership has 200 cars, and the cars cost an average of about $25,000 each, that's $5 million in inventory. Dealerships, 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 $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.
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."
For many dealers, holdback is a necessary part of their income. However, you'll also find dealers with such high turnaround that holdback is a type of profit for them - they actually make money on the interest subsidy because they're able to sell all their inventory very quickly. Having said that, it's very difficult to expect a dealer to share any of their profit from holdback with you. Most dealers are already operating with a pretty thin profit margin, and they feel like the holdback money belongs to them. Besides, most customers don't know about holdback or ask for it.
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.
Author Jason Lancaster, an auto business veteran, developed AccurateAutoAdvice.com. You'll find accurate advice on http://accurateautoadvice.com/new/new-car-buying-tips-how-much-should-a-new-car-cost/) new car negotiation tips and http://accurateautoadvice.com/new/what-is-dealer-holdback/) dealer hold back.
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