Holdback is money that an auto manufacturer pays a dealership 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.
Of course, when you’re borrowing $5 million you’ll have some pretty expensive interest payments. These interest payments are known as “floorplan.” This floorplan can add up to an awful lot of money very fast. Depending upon the interest rate, it can cost anywhere from $3 to $20 per day per vehicle in inventory. It doesn’t take long to do the math to figure out how expensive it is to stock inventory. Because of this expense, many dealers decide not to stock a lot of vehicles.
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.
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.
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.