Holdback is money that an auto manufacturer pays a dealership to stock their inventory.
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?
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.
Think about the amount of interest to borrow 5 million dollars. These interest payments, called “floorplan,” will add up to a lot of money very quickly. It will cost anywhere from $3 to $20 each day per vehicle in inventory, depending on the interest rate. Now think about how expensive it would be to stock an inventory of 200 cars with that kind of interest! Due to this expense, dealers wouldn’t be able to stock many vehicles.
Manufacturers have always been eager to sell as many cars as possible. If the dealers sell more, then the manufacturers will too. About thirty or forty years ago, manufacturers came up with “floorplan assistance” to help dealers stock their lots with more new cars. Presently, manufacturers pay 2-3% of the price of each vehicle to dealers to offset inventory costs, all in a drive to maximize sales.
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.
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