What Are Holdbacks For?
Dealerships must have an inventory on hand so that consumers can browse and ultimately select a vehicle. Dealerships must pay for this inventory when it is obtained from the manufacturer, and the amount the dealer pays is the price reflected on the invoice from the manufacturer to the dealer, the so-called "invoice price."
Now the twist: with the introduction of holdbacks some years ago, most manufacturers inflated the invoice prices for every vehicle by a predetermined amount (
2-3% of MSRP is typical). The dealer pays that inflated amount when it buys the car from the manufacturer. But later, at predetermined times (usually quarterly), the manufacturer reimburses the dealer for that excess amount. This is the "holdback," so named because funds are "held back" by the manufacturer and released only some time after the vehicle is invoiced to the dealership.
Why the sleight-of-hand you might ask? Because holdbacks can benefit dealers in three ways:
1) Dealerships borrow money to finance cars based on an invoiced amount that includes the holdback. So the higher the invoiced amount, the more the dealership can borrow from its lender.
2) Inflating the dealership's "cost" can have the effect of increasing profit, since sales personnel are paid commissions based on the "gross profit" of each sale. Holdbacks have the effect of lowering the gross profit and thus the sales commissions.
3) Holdbacks enable dealerships to advertise "invoice price" sales and sell their vehicles at or near invoice and still make hundreds of dollars on the transaction.
