A stocking agreement is a revolving credit contract between a dealer and a floor plan lender that finances the dealer’s inventory: the lender pays the manufacturer’s wholesale invoice directly, the dealer displays the goods, and as each unit sells the dealer repays that unit’s balance to the lender. The same arrangement is also called floor plan financing, wholesale financing, or a floor plan line of credit, and dealers in automobiles, trucks, RVs, boats, construction equipment, manufactured homes, and large appliances rely on it to keep inventory on the lot without tying up cash.1Office of the Comptroller of the Currency. Comptrollers Handbook Floor Plan Lending The agreement itself sets the rate, the payoff deadline on each sale, the curtailment schedule, the lender’s security interest, and the consequences of default.
How the Funding Cycle Works
The cycle starts when the dealer orders inventory. The manufacturer invoices the floor plan lender rather than the dealer, and the lender pays the full wholesale price. The goods arrive at the dealership, and the lender begins tracking each unit by serial number, wholesale cost, and daily interest.
Many manufacturers subsidize the opening weeks by offering interest-free “flooring” on new shipments, sometimes running 90 to 180 days depending on the product line and promotional calendar. Once that free window closes, interest starts accruing at the rate written into the stocking agreement.
When a unit sells, the dealer must remit the outstanding principal on that specific item to the lender, typically within about two to three business days. The lender releases its lien, the freed-up credit becomes available again, and the dealer can order the next shipment. That loop is the whole point of the agreement: the dealer never has to put its own cash into the wholesale cost of inventory.
Interest Rate and Carrying Costs
Floor plan rates are almost always variable, pegged to a benchmark plus a margin that reflects the dealer’s credit profile. Most stocking lines are currently priced at the Secured Overnight Financing Rate (SOFR) plus roughly 200 to 400 basis points. A dealer with strong financials and a long track record lands near the lower end; a newer or more leveraged operation pays more.
Interest accrues daily on each individual unit from the date the lender funds its purchase, or from the date the manufacturer’s free-flooring period ends if one applies. The longer a unit sits, the more it costs. A dealer who turns inventory quickly pays very little; one whose stock ages pays a lot.
Curtailment Payments on Aged Inventory
Lenders reinforce the pressure to move inventory through curtailment schedules. A curtailment is a mandatory principal reduction on any unit that hasn’t sold within a set number of days, and it kicks in whether or not the dealer has the buyer lined up. The OCC’s examiner guidance illustrates the mechanic with a new-car floor plan loan subject to a 10 percent monthly curtailment of the original advance starting in the tenth month, which reaches full maturity at 19 months; a used-car loan with the same curtailment starting in the fourth month matures at 13 months.2Office of the Comptroller of the Currency. Comptrollers Handbook Floor Plan Lending The specific schedule in your agreement will depend on the lender and the type of inventory, but the structure is consistent: age triggers paydowns, and paydowns come out of operating cash.
The Lender’s Security Interest
Every stocking agreement is paired with a security agreement that gives the lender a legal interest in the funded inventory. Under Article 9 of the Uniform Commercial Code, this is typically a purchase-money security interest (PMSI), meaning the lien attaches to the specific goods whose purchase the loan financed.3Cornell Law Institute. UCC 9-103 – Purchase-Money Security Interest; Application of Payments; Burden of Establishing PMSI status is valuable to the lender because it can beat an earlier blanket lien on the dealer’s assets.
That priority is conditional. A perfected PMSI in inventory beats a conflicting security interest in the same inventory only if the lender’s interest is perfected before the dealer receives the goods, the lender has sent an authenticated notification to any competing secured party, that party received the notification within five years before delivery, and the notification describes the inventory.4Legal Information Institute. UCC 9-324 – Priority of Purchase-Money Security Interests Miss a step and the floor plan lender can drop behind another creditor who filed first.
Perfection for inventory happens by filing a UCC-1 financing statement with the appropriate state office, usually the Secretary of State.5Legal Information Institute. UCC 9-310 – When Filing Required to Perfect Security Interest or Agricultural Lien Under UCC 9-502, a valid financing statement must include the debtor’s name, the secured party’s name, and a description of the collateral.6Legal Information Institute. UCC 9-502 – Contents of Financing Statement The debtor’s exact legal name matters: a filing that fails to provide it is “seriously misleading” under UCC 9-506 and can destroy the lender’s perfected status, with a narrow safe harbor if a search under the correct name using the filing office’s standard search logic would still turn up the filing.7Legal Information Institute. UCC 9-506 – Effect of Errors or Omissions The collateral description can be broad; under UCC 9-108, any description that reasonably identifies the collateral is enough, so floor plan filings often simply name “inventory” rather than list serial numbers that will churn.8Legal Information Institute. UCC 9-108 – Sufficiency of Description
What Lenders Require to Approve the Line
Approval requires a substantial documentation package. Lenders generally want several years of federal tax returns, current profit-and-loss statements, detailed schedules of existing inventory and outstanding debt, and the organizational documents that identify who has signing authority (articles of incorporation for a corporation, an operating agreement for an LLC).
The dealer also has to provide an insurance binder naming the lender as loss payee on the inventory. If financed units are destroyed by fire, flood, or theft before they sell, that designation routes the insurance proceeds to the lender first to cover the outstanding advances.
Personal Guarantees
Floor plan lenders almost always require a personal guarantee from the business owners. If the business fails and the liquidated inventory doesn’t cover the debt, the guarantee lets the lender pursue the guarantor’s personal assets.9National Credit Union Administration. Examiners Guide – Personal Guarantees
Guarantees come in two basic forms. An unlimited guarantee makes the signer responsible for the full outstanding balance plus interest and legal costs, with no cap. A limited guarantee caps exposure at a set dollar figure or a percentage of the outstanding line. When several owners are involved, the lender may structure individual guarantees proportional to equity, or insist on joint-and-several liability so any one guarantor can be pursued for the entire balance. The scope and cap of the guarantee are among the few terms where dealers have real room to negotiate.
Audits and Selling Out of Trust
Lenders verify inventory in person. Regular physical inspections, often unannounced, are a core feature of every stocking agreement. An auditor matches every serial number on the funding report against the units physically present. If a unit is missing because it sold, the auditor confirms the payoff was already remitted or is in transit. If a unit is simply gone with no corresponding payment, the lender has a problem.
Selling a financed unit and failing to remit the proceeds is called “selling out of trust,” and it is the most dangerous breach a dealer can commit under a stocking agreement. At the contract level, it typically triggers immediate default. The lender can accelerate the entire outstanding balance, not just the amount on the sold unit, and demand full repayment. If the dealer can’t pay, the lender has the right to repossess the remaining financed inventory.
Consequences extend beyond the debt. State licensing authorities may revoke the dealer’s license, ending the business entirely. If a prosecutor can show intentional diversion of sale proceeds, the conduct can cross into criminal fraud, and in some jurisdictions the intent to divert may be enough even when the dealer meant to pay the lender back later. Most sold-out-of-trust situations trace back to cash flow distress, where the dealer used sale proceeds to cover payroll or rent rather than paying down the floor plan. By the time an audit catches it, the shortfall is usually larger than anyone expected.
Default, Repossession, and Deficiency
When a dealer defaults, whether through selling out of trust, missed curtailment payments, or other breaches, the UCC gives the lender a strong set of remedies. The lender may take possession of the collateral after default, either through court action or through self-help repossession as long as it doesn’t breach the peace.10Legal Information Institute. UCC 9-609 – Secured Partys Right to Take Possession After Default In practice, that often means lender representatives arriving at the dealership, inventorying the remaining units, and hauling them away.
After repossession, the lender disposes of the collateral by sale or auction. Every aspect of that disposition must be commercially reasonable: the method, timing, place, and terms all have to reflect what a reasonable lender would do to maximize recovery. Sale proceeds are applied in a specific order, first to the costs of repossession and sale (including attorney fees if the agreement allows), then to the outstanding debt, then to any subordinate lienholders who made a timely demand.11Legal Information Institute. UCC 9-615 – Application of Proceeds of Disposition; Liability for Deficiency and Right to Surplus
If the proceeds don’t cover the full debt, the dealer remains liable for the deficiency, and the lender can sue for a deficiency judgment.11Legal Information Institute. UCC 9-615 – Application of Proceeds of Disposition; Liability for Deficiency and Right to Surplus If the owners signed personal guarantees, personal assets are on the table. If the sale generates more than the debt, the lender must return the surplus to the dealer. A dealer facing repossession should look hard at whether the lender’s sale process was actually commercially reasonable, because a lowball liquidation can be grounds to challenge the deficiency amount.
Tax Treatment of Floor Plan Interest
Federal tax law gives floor-planned dealers a meaningful benefit. Under IRC Section 163(j), most businesses face a cap on deductible business interest, generally limited to 30 percent of adjusted taxable income. Floor plan financing interest is carved out of that limitation and is fully deductible on top of the 30-percent cap.12Office of the Law Revision Counsel. 26 USC 163 – Interest
The definition has a limitation to watch. The statute defines “floor plan financing indebtedness” as debt used to finance the acquisition of motor vehicles held for sale or lease, secured by the inventory acquired.12Office of the Law Revision Counsel. 26 USC 163 – Interest That language clearly reaches auto, truck, and RV dealers. Dealers in boats, farm equipment, or appliances should ask a tax professional whether their inventory fits, because the “motor vehicle” language may not reach every type of floor-planned goods.
There’s also a trade-off. A business that deducts floor plan financing interest is generally ineligible to use bonus depreciation on its other assets for the same tax year. Choosing between the full interest deduction and accelerated depreciation on capital equipment is a decision to run through with a CPA before year-end.