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The good, bad and ugly of the SBA floorplan program

NOTE: This is Part I of a two-part look at the SBA loan program.

Exuberance echoed throughout the marine industry when the Small Business Administration announced it would begin using TARP funds to guarantee dealer floorplan loans under its 7(a) program. It was an overdue action, to be sure.

After all, SBA has already expanded the scope of TARP to save Chrysler and GM, and even some big insurers. So providing emergency assistance to small businesses like boat dealers using some bailout funds makes real sense.

But it seems the music has quickly died since the program was announced. To date, there have been no known applications for an SBA floorplan loan guarantee. So it appears what started as good has now turned bad — one might even say ugly. Or has it?

Certainly the “good” started with the White House finally acknowledging the nation’s small businesses are the key to economic recovery and employment. Representatives of the MRAA and NMMA have diligently worked to get boat floorplanning included in SBA’s small business initiative.

The pilot program began July 1. Since then, it’s good to report that SBA has shown a genuine openness to modifying and improving the program to make it work. SBA has solicited comments and input. MRAA, NMMA and others have responded by submitting extensive recommendations for program improvements and continuation.

All that “good” notwithstanding, some “bad” has also bubbled up in a variety of ways. First, misinformation about the program’s guidelines has created confusion and disappointment. Here are a few examples:

  • True or False: A dealer cannot qualify if he has a net worth over $3.5 million. False. The limit is net worth in excess of $8.5 million. These days, I would guess many dealers will be under that cap.
  • True or False: A dealer cannot qualify if he has over $3 million in gross income. False. The dealer cannot have average net earnings in excess of $3 million after taxes during the past two years. Again, many dealers won’t have a problem meeting that cap.
  • True or False: The SBA-backed floorplan loan can refinance existing inventory. False. It cannot. But it will back up a separate new line of credit so dealers can inventory new models.
  • True or False: Banks filing for the SBA loan must use the same lending criteria to determine risk as they have in the past. False. SBA does not require those standards be applied but encourages banks to rewrite loan criteria because the resulting loans will be SBA-backed.

So where are the misunderstandings coming from? Certainly not any one source. First, we are dealing with the government, right? Can you say, expect built-in confusion? Second, as an industry so hungry for help, we were clearly overexuberant when announcing success and, thus, created an image of a floorplanning quick-fix. Clearly, we have made huge progress toward possible SBA assistance, but realistically, we still have work to do.

Then, there are banking issues. For example, finding an SBA-approved lender can be a problem. We’re finding out many banks simply refuse to deal with SBA-guaranteed loans. So they blow off the inquiring dealer by saying strict loan standards must be met.

For example, the dealer must be current on existing floorplan interest, fees and curtailments with a present lender, or last year’s financial statements must have shown a profit — both standards many dealers cannot meet. But are these and similar requirements reasonable or even necessary?

One thing is clear: It’s the banks that will ultimately be the reason the SBA guarantee program floats or doesn’t.

Part II of this Dealer Outlook assessment of the SBA floorplan program will be posted Thursday, with a deeper look at the banks and related issues.

Until then, enjoy today’s video from the NMMA’s “I Discovered Boating” contest. Click here.


10 comments on “The good, bad and ugly of the SBA floorplan program

  1. craig

    I listened to the SBA group conference call and they said they would finance existing inventory but not with the current carrier.

  2. Noel Osborne

    Until someone convinces the banking community that the marine industry is a good credit risk we are wasting our time on this one. Can the marine manufacturers collectively persuade the banks that we know what we are doing and are a good credit risk? If not, we are trying to push water uphill. Don’t expect the dealers, on their own, to solve this problem. It ain’t going to happen!!!!!!

  3. bruce

    I had looked into this program with my bank (chase) and was informed that its too much paperwork and doesnt generate enough profit for them or most of the banks qualified to do SBA loans. Glad to see the government did include the boating industry in this program, but as usual never works for the small business person. I guess we will have to just let GE keep gouging us out of business!!!

  4. Bentley Collins

    I have been working on this issue a lot and I can tell you that as of today my dealers have not encountered one bank that has even considered the SBA backed floorplan program. The simple reason is that these smaller banks are full of cash and they haven’t even begun to feel the effects of the poor economy. They are protecting their assets at all costs and not willing to take the slightest of risks. Nor are they even willing to discuss anything that sounds risky. They should all be ashamed of themselves. They are the entities that are preventing the recovery programs from working as they were planned to.

  5. Randy Wattenbarger

    We are several weeks into the SBA app process. The longest hangup so far has been that our bank, which is already an approved SBA lender, had to additionally qualify as a SBA “floorplan approved” lender. Notified today that they have been so approved. Said to expect SBA approval in 3 – 6 weeks.

  6. Bill Thompson

    While the SBA program offers some hope of reasonable financing, you are correct there are issues both in misconceptions and in how the banks are reacting. I am of the opinion that this program will have a positive effect as the issues are ironed out. The biggest problem is in that it can’t happen fast enough. First, a few notes on your list.
    • A dealers tangible net worth cannot exceed $8.5MM and they have to have averaged less than $2MM in net profits for the past two years.
    • What isn’t talked about is the personal net worth of any 20%+ owner. If any shareholder’s household liquid net worth is in excess of $750,000 or 1X the amount being requested, whichever is greater, that business is ineligible for the SBA guarantee.
    • Craig is correct, a lender CAN refinance inventory, with another lender. A current lender cannot roll the line of credit into an SBA guaranteed loan.
    • You are correct; the SBA does not dictate lending guidelines.

    From my point of view there are two points that need to be acknowledged with this program.
    • Eligible Lenders – If a lender is deemed “less experienced floor plan lender” they can only pursue SBA backed floor plans with clients/business they had PRIOR to July 1st. If you haven’t done business with the local lender, he may not be able to now provide you with an SBA guaranteed DFP line.
    • Advance – A 75% guarantee of an 80% advance is considered inadequate for some banks. Especially when asked to provide 100% financing, thereby leaving them 60% guaranteed. That said, if your manufacturer will provide a repurchase agreement, the bank now has double protection. Make sure they know that when you educate them as this will help.

    This program will take time and education in helping the lenders see the merits of doing business with us. At the same time, it will require dealers and manufacturers to take the time to learn how to deal with new lenders as well as complex government programs.

  7. Bob Bejesky

    A couple of other points to consider.
    While it is important to have an existing relationship with a bank which you are hoping will consider your business for an SBA, the contact person your company has with the bank is most likely not the right person to talk to regarding SBA. Most banks have specific personnel handling those loans.
    SBA has a pre-determined format you must follow at some point to be considered. There are dealers out there that will claim it is too much to ask of them to complete these forms, and too many hoops to jump through. Since most dealers have never operated in an environment where there were not multiple finanicing sources competing for their business, they will have to get used to the idea that SBA will not waive requirements. This is an area where manufacturers could and probably should help dealers meet the SBA requirements.

  8. Don Thurston

    Noel is correct. This is a great waste of your and my time. No offense Norm, but this article doesn’t deserve the light of day in that it confuses dealers into thinking congress has tried to do us some good. In their haste to save small business, our Reps. and Senators forgot to ask the banks if they would play. As recently as last week, a good friend of mine and ex Chrysler Dealer was in Washington with some other ex-mopar dealers trying to secure an audience with their Reps. only to get shoved off to one or their special assistants. He and his group returned totally amazed and discouraged that the Washington group believes the SBA program to be a brilliant solution to our needs, and were amazed that things weren’t “moving in a positive direction”. (listen to me, I’m talking like a politician !!)
    We (my partners and I) are determined to make it through this downturn, but would very much like to have some help from our leaders in the MRRA by turning up the heat on those who can do something positive for the industry. We can sit at the table and decide how to dice up Genmar’s money or we can sit down and realize we need to change the way we do business with our manufacturers. Unless we dealers cure the credit problems our industry faces, we can put each and every manufacturer through the process of bankruptcy and still end up with a manufacturer who can’t sell his goods to buyers who can’t afford to buy them.
    I think we are running out of time. The entire industry seems to be running on empty. I am aware of some bright spots, but the truth will be told when these dealers count their sheckles as they put together deals while competeing with those dealers and liquidators still dumping old inventory.
    NMMA / MRRA National Credit Corporation. How does that sound? Too big to every happen ? Too necessary to never happen !

  9. Komrade Carl

    To Don Thurston & others who thing a trade organization can carry the water.
    They (NMMA/MRAA) couldn’t run (or properly fund) a grow boating advertising campaign. How do you expect them to be a coast to coast, border to border finance company? It’s time to realize the quantum shift has happened! The business model based on using other peoples money is over! You are going to have to open your own wallet & buy (pay) for your inventory if you want to be a dealer. The manufacturers all expanded in the last 5 years to capacities beyond demand. They have no deep pockets either, because they were also expanding & running on O.P.M. (other peoples money).
    The sooner you accept this and change to an I own what I sell mentality the sooner you will start moving forward. You most likey will be smaller in scope & offering but so will everyone else. The retail customer will soon realize they have to accept that the variety at dealers has deminished & if they want to purchase a model with an option package (motor, or trim level) that the dealer doesn’t stock that they will have to wait for it to be built. It is the present & the future.

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