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.

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.

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.

Holdback is an essential part of income for most dealers. There are some dealers, however, with such high turnaround that holdback becomes profit for them. That is, they actually make a profit from the interest subsidy because they sell their inventory so fast. When this does happen, you shouldn't expect that a dealer will share any of their holdback profit with you. Since most dealers are already operating with a small profit margin, they feel that any profit from holdback is theirs. Most customers don't ask for or even know about holdback anyway.

Be sure to follow our standard advice on car negotiating if you are trying to get a good deal: go online and get several quotes. If there is a car you are thinking about buying that the dealer really wants to sell, you may be able to buy it for less than invoice. They will still have the money from holdback even if they don't make a profit, and you will get a vehicle at an excellent price.

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Author Jason Lancaster, a car industry veteran, developed AccurateAutoAdvice.com. You'll find accurate advice on new car negotiation tips and dealer holdback.