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Part II: The good, bad and ugly of the SBA floorplan program

On Tuesday, I touched on some of the good and bad in the recently announced SBA floorplan loan guarantee program. If you didn’t see it, please go back and read it, along with the reader comments, some of which I’ll refer to here.

I said on Tuesday: It’s the banks that will ultimately be the reason the SBA program floats or sinks. If they get on board it will succeed. And why wouldn’t they? After all, to a non-banker like me, it appears attractive to be able to loan money at a good spread and have the lion’s share of any risk secured by an SBA backstop. Why, then, does it appear banks are stiff-arming the program?

First, the banking industry, in general, is getting pounded by rising consumer loan delinquencies, mortgage defaults, commercial real estate losses, increased federal reserve requirements and more. And while much of the pain was self-inflicted, the bottom line is today’s bankers have swung away from “loans to anyone with a pulse” to “if there’s any risk, we don’t want it!”

Clearly, banks are now structuring their lending policies on worst-case scenarios. It’s easier to sit and do nothing, making money from myriad fees, than to take any risks.

That said, however, banks are still in business to make money. There are many smaller local banks that didn’t plow headlong into the real estate markets and, therefore, have a very low ratio of non-performing loans. That means there are opportunities out there. And there are many industry people working to make floorplan lending even more attractive to these lenders through the SBA program. Equally important, the SBA also wants to improve the program and is responding favorably to the industry.

So what are the MRAA, NMMA, NMBA (National Marine Bankers Association) and others urging SBA to do to make the program more appealing for banks and dealers? Some highlights:

  • Increase the maximum loan amount from $2 million to $4 million, an amount that reflects the need and definition of small business. Plus, some major banks have indicated they would only consider larger loan amounts.
  • Conversely, reduce the $500,000 minimum loan amount, thus making the program applicable to businesses unable to obtain but still needing only a small floorplan for inventory.
  • Increase the maximum advance rates to 90 percent. Currently, SBA is lumping boats with used cars that qualify for only advance rates of 80 percent with a 75 percent guarantee. New cars currently get a 90 percent advance rate with 75 percent SBA guarantee. This is patently unfair to marine products and favors one industry over another.
  • Change the program to allow refinancing of existing or new inventory with an existing lender. The program now only permits refinance of existing inventory with a new lender. Including SBA guarantees for existing lenders who are dropping their floorplan programs could be incentive to stay in the business.
  • Review Bill Thompson’s comments posted to Tuesday’s Part I for more good insight.

For dealers, a major problem is finding a lender that’s willing to work with SBA loans. The 7(a) SBA program is notorious for its time-consuming, lengthy application process. Then there are unnecessary barriers to entry for banks that aren’t already doing floorplans but would do such lending via the new SBA program. At the same time, there are also policies that don’t help keep existing floorplan lenders in the business, either.

Despite of all that, however, there is a definite upside potential for all credit providers in the new SBA program. To advance it, it’s notable that NMBA is executing a three-pronged effort:

1. working directly with SBA representatives to improve the program

2. promoting to lenders around the country that floorplanning and consumer credit for boats can produce desirable yields

3. providing banks with educational materials and assistance in starting up such lending, identifying participating banks and assisting with the process

Commenting on the floorplan dilemma, dealer Noel Osborne wrote on Tuesday: “Don’t expect the dealers, on their own, to solve this problem.” He’s right. It will take the collective efforts of manufacturers, suppliers, dealers and bankers. That collective effort is under way, and while it will take some time to hone, it will happen.

To illustrate that, Randy Wattenbarger reported good news on Tuesday: “We are several weeks into the SBA app process. The longest hang-up 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!”

Enjoy today’s I Discovered Boating video. Click here.

Comments

7 comments on “Part II: The good, bad and ugly of the SBA floorplan program

  1. Dave Norton

    Lets face it Dealer’s and Manufactures got into trouble because they were trying to make the Marine industry bigger that it is. If you have to go to the SBA for your money your didnt have it figured out right to begin with. Way too much red tape. Dealers that are surviving are doing it because they saw this comming and had planned for it. This dowmturn is probably worse that anyother but we have had this happen many time before, trust me it will change and it will happen again. The Marine industry is small and will stay that way and not profitable with so many dealers trying to sell more product than the maket can take. If you didnt grow up boating you probably wont stay in it for long. Most of my customers grew up boating and will do it at all costs because that is part of their inner self. We as Marine dealers and manufactures have tried for years to make the market bigger and it just wont happen. Work hard at what you do, keep your customers happy and do t for a profit. Thats what we have done and were not in trouble, we dont try to be anything but good boat dealers with quality service for a fair price, yes we have to earn our customers everyday. Just do it.

  2. dave boso

    Boyo’ I really feel bad that the banks let “Barney and Chriss” and some of the other libs in congress force them into making loans that they knew were never going to get paid back. an Now like all the other businesses that didn’t take care of business they are making the rest of us pay….do you think that’s bit harsh?

  3. Don Thurston

    Ed Lofgren’s email on behalf of the MRAA details the issues to be straightened out with SBA program.
    Too bad that Ed and company weren’t asked by the SBA for a wish list prior to the creation of this program. I know that he could have communicated to them as clearly as in his letter just what we in the boat industry need. As a successful boat dealer, he lives this every day and serves us very well as Chairman of the MRAA.
    Telling a bank that it can floorplan boats does not neccesarily fit their business plan when done on a small scale. It is an expensive and very detailed side of the business that as we see, even the biggest players don’t want a part of.
    The solution has to be done on a large scale deeply involving the manufacturers and dealers in order for this ever to become a “high stakes” game.

  4. Michael Ellsberry

    As a person who works with businesses every day in seeking financing, let me offer some additional perspective to the worthwhile comments already written.

    Please remember that the SBA doesn’t make direct loans (except in disasters). If banks are not interested in making loans, then the SBA has no role to play. Many banks quit particpating in SBA loan programs because of the perceived difficulty in dealing with the SBA. And, not so much in the application process but especially so in the liquidation phase for loans gone bad.

    Please remember this. The SBA didn’t do any guarantees of rolling inventory or floor plans up until a few weeks ago. It will take awhile for the procedures to settle out. Further, there are several new loan programs that the SBA is dealing with simultaneously, so that is especially challenging.

    All of us realize that most banks exited floor plan financing in part because of the human input needed. It’s very possible that no amount of guaranty will encourage banks to re-enter a business niche that they exited in the past.

    Norm Schultz is right about size standards adjustments needed for the new loan plan. I am skeptical that adjustments proposed to the SBA can be incorporated into the program in a timely manner to solve the flooring planning needs for the recreational boating industry in an prompt enough manner.

    The industry must look to other solutions including encouraging traditional floor planning lenders who have recently left the marketplace to return or inducing the lenders who bought the floor plan lender’s assets to get back into floorplanning.

    The key is a decision by lenders to realize that if credit standards were too liberal in the past then the correction has been way over done.

    Mike Ellsberry

  5. Bill Thompson

    As I have started helping dealers with finding financing and talking to dealers, manufacturers, lenders and SBA personnel I have seen a great deal of disparity amongst what people think and the results they are having. As many news reports point out, banks are reticent in lending to anyone these days. In particular lines of credit, regardless the form, are being avoided or reduced. While there are lenders willing to lend, finding them is the trick.

    Relationship with the lender is the key and takes some work. Realize that asking a bank to start a floor plan program is a daunting task for them. As I have chatted with dealers I have come to this realization, they scare bankers on many levels. I coach dealer to start the conversation with “I am a small business looking for a line of credit to buy inventory with to sell to my customers.” Period. Small business lenders understand this and in many cases can fill the void with a line of credit that doesn’t have the strings of a floor plan line.

    When speaking with the local SBA folks, they point to the slow rollout of the CAP loan program where the SBA first started guaranteeing lines of credit. Similar to what is happening today, large banks started by avoiding the program and small banks were slow to adopt. Over time that program has become viable and widely utilized. We will need to fight to make sure the 7(a) DFP program does the same. This will require active education of dealers and lenders along the way.

  6. Mark Qualkinbush

    •Increase the maximum loan amount from $2 million to $4 million, an amount that reflects the need and definition of small business. Plus, some major banks have indicated they would only consider larger loan amounts.

    This is wrong in regards to floor plam. It should less, more like 300k per manufacture and not to exceed what matches the market you do business in for overall sales. Dealers need to quit assuming all the risk, so if dealers are to assume all the risk dealers need to start thinking like banks, what’s my exposure?

    •Conversely, reduce the $500,000 minimum loan amount, thus making the program applicable to businesses unable to obtain but still needing only a small floorplan for inventory.

    This I agree with.

    •Increase the maximum advance rates to 90 percent. Currently, SBA is lumping boats with used cars that qualify for only advance rates of 80 percent with a 75 percent guarantee. New cars currently get a 90 percent advance rate with 75 percent SBA guarantee. This is patently unfair to marine products and favors one industry over another.

    I think this needs to be 100% not to exceed wholesale or trade in market value. The dealer needs to make the call here. Can he make money on the traded unit?

    I don’t need to go with my thoughts on the SBA program simply because it’s pointless. Dealers need to wake up and understand every penny borrowed for anything is debt. Dealers needto start putting a reserve away for every unit sold so they can start paying cash for units. Every time I read about floor plans or lines of credits I cringe but guys it’s a new day and age PROTECT YOURSELF yet understand that builders still have to get product out the door and we have to be profitable.

    Mark Q

  7. Noel Osborne

    I just returned from an SBA seminar today in which they proudly announced all the various programs they were able to offer to America’s small businesses in these troubled times. Among those presented was the DPP (Dealer Floor Plan) program. I questioned them openly on the success of these programs and they admitted that there were some current prblems that had to be addressed. Privately they admitted to me that the DFP (Dealer Floorplan Program) had notfunded a single dealer. Further they were not optimistic that the problems would ever be corrected to the point where the banking community would agree to be involved in it.
    Mike Ellsberry is correct in his above statement when he stated that the banks were concerned about the liquidation procedd if these loans woul become distressed. It seems that the SBA looks for every opportunity available to escape their guarantee resposibilities if a loan defaults. This clearly shows that there are two side to this issue.

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