Do you know how to finance a car dealership?

Financing a Car Dealership Requires More Than a Standard Commercial Loan

A car dealership purchase sits somewhere between a business acquisition and a commercial property investment, which means the loan structure needs to account for stock, premises, and operational cash flow all at once. Most lenders treat the property component separately from the stock and working capital requirements, so you're often looking at a combination of commercial property finance for the land and buildings, a business loan for goodwill and fit-out, and a separate line of credit or floor plan facility for vehicle inventory.

The total loan amount depends on whether you're buying a freehold dealership with the property included, leasing premises separately, or acquiring an existing franchise territory. A freehold dealership in a regional area might involve a commercial property loan at 60% to 70% LVR, while a metropolitan franchise operation without property could require a larger unsecured component backed by other collateral.

How Lenders Assess a Car Dealership Purchase

Lenders separate the dealership into distinct components. The property itself is valued as commercial real estate and financed with a secured commercial loan against the land and buildings. The business value, including franchise rights, customer database, and goodwill, is assessed based on historical profit and loss statements, usually requiring at least two years of financials if you're buying an established dealership. Stock is typically excluded from the initial acquisition loan and financed separately through a floor plan facility offered by manufacturers or specialist lenders.

In our experience, the biggest issue isn't getting approval in principle but structuring repayments around the dealership's cash flow cycle. A dealership might hold $2 million in stock but only turn over a portion of that each month, which means servicing a large acquisition loan while managing inventory finance requires careful planning.

Consider a buyer acquiring a franchise dealership in a suburban location for $3.5 million, including $1.8 million for the property, $1.2 million for goodwill and fit-out, and $500,000 for working capital. The lender structures this as a commercial property loan at 65% LVR for the premises, covering around $1.17 million, and a secured business loan for the balance of the acquisition price. The buyer contributes $1.2 million from the sale of another business, and the dealership's existing cash flow supports the repayments. The manufacturer provides a separate floor plan facility for vehicle stock, which operates as a revolving line of credit tied to individual vehicle sales.

Variable vs Fixed Interest Rates for Dealership Loans

Most commercial property loans for car dealerships are written on a variable interest rate because the loan term is typically shorter than a residential mortgage, and buyers want the option to refinance or sell without break costs. A variable rate also allows access to a redraw facility if the dealership generates surplus cash flow that you want to park against the loan.

Fixed interest rates are more common when the buyer wants certainty around repayments, particularly if the dealership is being established or expanded and cash flow is less predictable in the first few years. Some lenders offer a split structure where the property component is fixed and the business loan remains variable, giving you certainty on the larger debt while retaining flexibility on the operational funding.

Franchise Requirements and Lender Conditions

Most car manufacturers require the dealership premises to meet specific standards for signage, showroom layout, workshop equipment, and customer facilities. These franchise requirements often dictate the loan structure because the fit-out and compliance work can add $300,000 to $600,000 to the total cost, and not all lenders will include that in the commercial property loan.

Some manufacturers also require the buyer to maintain a minimum net asset position or provide a personal guarantee, which can affect how much additional lending you can access from other lenders. If you're buying into a franchise territory, the manufacturer may have preferred lenders or floor plan providers that you're required to use, which limits your options for the stock finance component but doesn't necessarily restrict your choice of lender for the property or business acquisition.

Working Capital and Stock Financing

The vehicle stock itself isn't usually financed through the same loan that covers the property and goodwill. Most dealerships use a floor plan facility, which is a form of inventory finance where the lender pays the manufacturer directly for each vehicle, and you repay the lender when the vehicle is sold. Interest accrues daily on each unit, so the cost of holding stock is directly tied to how quickly you turn it over.

Floor plan facilities are structured as a revolving line of credit, meaning the available balance replenishes as vehicles are sold. The loan amount for the floor plan is based on the dealership's projected stock holding, which might range from $1.5 million to $5 million depending on the franchise, location, and sales volume. Some buyers underestimate the working capital required to cover the gap between paying for stock and receiving customer payments, particularly if the dealership also handles trade-ins or offers in-house finance.

Collateral and Security for a Dealership Purchase

A freehold dealership provides the land and buildings as collateral for the commercial property loan, which is usually enough to secure 60% to 70% of the property value. The balance of the acquisition price is secured against other business assets, personal property, or a second mortgage over residential real estate if you're bringing additional security into the deal.

If you're buying a leasehold dealership without property, the lender may require a registered charge over the business assets, including fit-out, equipment, and franchise rights, plus a personal guarantee. Some lenders also take a second ranking security over the dealership's receivables or future stock, although this is less common because the manufacturer's floor plan provider usually has first call on the inventory.

Pre-Settlement Finance and Progressive Drawdown

Pre-settlement finance can cover the deposit and initial costs before the sale finalises, which is useful if you need to start the fit-out or meet franchise conditions before settlement. This is typically structured as a short-term facility that converts to the main commercial loan at settlement, with interest accruing from the first drawdown.

If the dealership requires significant construction or refurbishment, a progressive drawdown structure allows you to access funds in stages as the work is completed. The lender releases funds based on progress reports from a quantity surveyor, which keeps interest costs lower during the construction phase and ensures the loan amount is tied to the actual value added at each stage.

Loan Terms and Repayment Flexibility

Commercial property loans for car dealerships usually run for 15 to 25 years, depending on the property type and borrower profile. The business loan component is often shorter, with terms of 5 to 10 years, because lenders expect the goodwill and fit-out to be refinanced or repaid as the dealership builds equity.

Flexible repayment options, including interest-only periods, are common in the first few years if the dealership is being expanded or if cash flow is allocated to stock and working capital rather than debt reduction. Some lenders allow early repayment without penalty on the business loan component, while the property loan may have fixed terms or break costs depending on whether it's written on a variable or fixed interest rate.

Commercial Finance Brokers and Access to Specialist Lenders

A commercial Finance & Mortgage Broker can connect you with lenders who understand car dealerships and have experience structuring loans around franchise requirements, floor plan facilities, and mixed-use properties. Not all banks lend on dealership acquisitions, and those that do often have specific criteria around location, franchise brand, and buyer experience in the automotive sector.

Access to commercial loan options from banks and lenders across Australia means you're not limited to the manufacturer's preferred lender or your existing bank, which can result in better loan structures and more flexible terms. A broker also coordinates the property valuation, business valuation, and legal documentation so the different loan components settle at the same time, which is critical when you're buying a dealership with multiple funding sources.

Call one of our team or book an appointment at a time that works for you to discuss how we can structure a commercial loan for your dealership purchase.

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