Floorplan Program a ‘Radical Departure’ for SBA
The U.S. Small Business Administration (SBA) on July 1 rolled out a much-awaited pilot floorplan lending program designed to help recreational vehicle, automotive and boat dealers finance their inventories. The SBA’s action came after many dealers found their ability to finance floor inventories severely hampered after last fall’s collapse of global credit markets. Indeed, credit – or the lack thereof – has become one of the hottest topics in the recreational vehicle sector as it has throughout global business markets. The SBA’s new program allows RV, automotive and watercraft dealers to establish revolving lines of credit through 3,000 active, SBA-sanctioned banks ranging from $500,000 to $2 million, with the SBA guaranteeing 60% to 75% of the loan, depending on collateral. These floorplan loans, to be repaid within five years, are available under the SBA’s 7(a) program, which typically guarantees 90% of the amount. To further explore this new program, RVBusiness Senior Editor Bob Ashley recently interviewed Grady Hedgespeth, director of the SBA’s office of financial assistance.
RVB: So, how does this pilot program work? Do dealers apply directly to the SBA?
A dealer would not make an application directly to us. Most of the programs outside of disasters we guarantee are for loans that a lender would make. In that regard, this pilot is no different. A dealer would make the application to the lender and the lender would determine whether they are eligible conventionally or via SBA.
RVB: Is this a considerable departure from what the SBA ordinarily does?
This in many ways is a radical departure for us. For most of its lending history, SBA specialized in term loans with the philosophy that one of the toughest types of financing for small businesses is to get long-term fixed-rated financing. For most of our 40-some-year history of experience with loan programs, that’s what we did. It was only about 10 years ago that we actually started our first revolving loan program, and dealer programs are a type of revolving loan.
That was the CAPLine program, primarily for the financing of inventory where current inventory is put up as collateral. It’s different than floorplan financing because the collateral that backs the loan in a floorplan is actually the collateral you are trying to sell. In CAPLine, it’s the inventory that you already have in your possession that’s placed as collateral to get more inventory.
About five years ago we developed our SBA Express product that involves revolvers that allows for smaller working capital lines of credit, some of which may be revolvers. They are really for smaller dollar loans, under $150,000 to $350,000. Those two types of products were our most recent experiences with revolving lines of credit.
Importantly, because of the nature of revolving lines of credit and the risk, our maximum guarantee on those two products has only been 50%. That’s important because there have been some comments on the dealer floorplan program that the guarantee range is 60% to 75% and people are comparing that to the 90% that is now part of the Recovery Act.
So, compared to our standard revolving credit line product, the guarantee that we have for the dealer floorplan is quite generous.
Generally on the revolving lines of credit, we expect the lender to take on a fair amount of the risk. We actually think that we’ve improved upon on our typical revolving credit line product with what we are offering for dealer floorplans. We really provide an added incentive for lenders to consider prudently adding this particular product to help dealers who are facing a transition because of the current economic climate and downturn in sales.
RVB: How many lenders do you expect to participate in this program, and is there a list of current participating lenders available?
At this point, we do not have a list. Frankly, we are still looking for which lenders will participate. With any new SBA loan program, very frequently it takes four to six weeks for lenders to decide if they are going to participate.
Floorplanning is kind of a niche marketplace. Larger banks are much more efficient at accessing the secondary market and that makes it less attractive for regional banks to be in the floorplan business.
RVB: Will both large and small banks be involved?
That’s the interesting thing. I think it’s going to be the latter. We’ve really designed this initiative to empower regional banks to have an opportunity to look at their customer base and take dealers that they’ve known for years — and have had credit relationships with and may have lost their primarily floorplan line from the larger national players — and step in to provide the kind of floorplan they need for their transition.
We also wanted to encourage some of the players who do floorplanning on a more limited basis to see whether they wanted to expand their floorplan line to step in to fill the void left by some of the larger regional players who have exited the business.
RVB: We assume that banks have to qualify for this program?
The basic qualification is that they have to be an SBA lender. But we created basically two categories for lenders. One is for lenders who are less experienced with floorplans, which we define as those with less than $15 million of floorplan business on their books or that have been doing floorplans for less than five years.
For these less experienced lenders, we are putting just a couple of restrictions on the program. One, they have to send all of their loans to our loan processing center in Citrus Heights, Calif. It’s for their protection. We review their underwriting to make sure it meets standards that are prudent and reasonable. So when we give the OK on a loan like that, they don’t have to worry that if that loan goes bad that we will second-guess their underwriting.
A second important restriction for those less experienced banks is that we are limiting them to doing floorplanning with customers that they had before the pilot program took effect July 1. We want to empower them to work with customers they know – dealership owners with whom they might have previously had a working capital or real estate or wealth management program.
RVB: What about lenders who have floorplan experience?
For lenders who have been doing floorplanning, they can entertain new floorplan loans from any customer that they want. It doesn’t have to be an existing customer.
If they are a lender that has delegated lending authority from the SBA, their first loan has to come into Citrus Heights and we are going to ask for their policy on floorplan lending so that we have something to use if the loan goes bad to show that they did what they said they were going to do. But after the first loan, if they are a delegated lender, they’re free to use this program to entertain as many customers as they like.
RVB: Does this mean that dealers working with smaller lenders will be at a disadvantage because their loans will have to undergo extra SBA reviews?
No, we’ll get to know them pretty quickly and should be able to move their loans through our system quickly. We are going to give these loans a priority. We know the critical importance of these dealer floorplans loans. We are geared up to put it on an expedited track.
RVB: Is a small lender, a local bank, going to more than likely be an SBA lender already?
We have about 5,000 lenders out of 8,000 banks that have a Form 750 agreement with the SBA, which is the basic agreement between the banks and the SBA. Of that 5,000 or so, there are about 3,000 that are active. And because of the Recovery Act, 600 of those 3,000 have recently come back into active SBA lending.
There are a number of banks who may have done SBA loans years ago, but for one reason or another left the program who are taking a second look as a result of the incentives in the Recovery Act. We are hoping that this dealer floorplan program might be another incentive so that they will consider SBA again.
RVB: Do you have any sense of when this program will be getting underway?
No. I know we have had some active conversations going on with a couple of lenders, but they are intellectual ‘what ifs.’ They’ve got a dealer who has inquired informally and they are just asking if it’s likely that they would qualify. That’s a good indication for the first week of loan availability because that suggests to me that we’re going to start seeing applications begin to flow very shortly.
RVB: How this is going to split out between RV, automotive dealers and boat dealers?
I have absolutely no sense about that. I know we have a lot of business among our SBA lenders within industries covered by the major dealers types. The SBA has issued $1.125 billion of credit to these industry groups. That was another indication to us that our lending partners really do have an intimate knowledge of the credit worthiness of retail dealers of these types of assets.
RVB: We should point out that the maximum loan of $2 million is not a lot for an RV dealer. That could be 10 units.
Unfortunately, that’s a statutory restriction for the SBA right now.
RVB: Are you aware of the changes in the program that the Recreation Vehicle Dealers Association (RVDA) is promoting to make this program available to more dealers?
I’m not intimately familiar with their proposals, no. I will say this: We introduced a Federal Register notice with a 30-day comment period. Our key interest here was trying to get this to the marketplace just as soon as we possibly could. We think it met a lot of needs that we had to consider, such as prudence and compatibility with our existing SBA portfolio. But like anything else, it could probably be improved with a lot different eyes looking at it. So, we will be taking comments. There are some things we can’t do, such as raising the maximum limit on our maximum loans.
RVB: So, you can adjust this program as it goes forward?
Yes, we will consider adjustments. We have some constraints with the Office of Management and Budget that we have to meet. But we are open to suggestions. The other issue is that we will evaluate this pilot at the end to see whether or not it makes sense for it to be a more permanent part of the SBA portfolio.
RVB: And there’s a limit, we’re told, to the permissible number of loans?
There is a 10% limit on pilot programs in a fiscal year. This pilot program will straddle FY09 and FY10 so that would be 10% of the total volume in ’09 and 10% of the total volume in ’10. Right now we are running at about 50,000 (total) loans. I don’t think the cap is going to be a problem for this program in either ’09 or ’10 as well.
RVB: OK, then, what does all this mean to dealers?
I would encourage dealers to have a sound business plan. That is a key to communicating with their lenders. It’s also always good to start with people and institutions who know you, but that still may not guarantee that they are going to participate in floorplan lending. Interestingly, floorplans tend to be the best collateralized loans. It’s usually not just the inventory backing the loans, but very often real estate and personal guarantees of the owner. So as we look at the experience of major floorplan lenders, it’s the kind of thing that if you manage it well and you put in provisions that will allow lenders to do the extra servicing that is required of a floorplan, then this should be something that is an opportunity for moderate- and smaller-sized banks to step up to the plate.