Today (Feb. 5) in Lanham, Md., President Obama proposed the expansion of two critical Small Business Administration (SBA) lending programs, aimed at allowing small businesses to refinance and increasing limits for working capital. These are both legislative proposals designed to help small businesses through what continues to be a difficult period in credit markets, according to a White House news release.
President Obama said, “The true engine of job creation will always be businesses. What government can do is fuel that engine: by giving entrepreneurs and companies the support to open their doors, expand, and hire more workers. Today, we’re taking another step towards assisting small business owners get the capital they need to grow and hire.”
SBA Administrator Karen Mills said, “These proposals will provide us with two effective tools to help small businesses meet specific challenges brought on by the recession. First, in the tight credit market of the last two years, lines of credits have been cut for small firms. Raising the limit on SBA Express loans to $1 million will mean more small business owners will have quicker access to this source of capital to help restock inventories and support larger revenue sales, and literally take that next step to grow their business and create new jobs. Second, thousands of good, creditworthy businesses find themselves caught by declining real estate values as a result of this recession. With many of them now facing mortgages coming due in the next few years, the ability to refinance into SBA’s 504 loan will give them the chance to lock in long-term, stable financing, as well as protect jobs by protecting small businesses from foreclosure.”
Details of the President’s new small business initiatives are below:
1. Expand SBA’s existing program to temporarily support refinancing for owner-occupied commercial real estate loans:
The administration is proposing legislation to temporarily allow for the refinancing of owner-occupied commercial real estate (CRE) loans under the SBA’s 504 program, which provides guarantees on loans for the development of real estate and other fixed assets. Currently, 504 loans cannot be used for the refinancing of maturing debt. This change would respond to the difficulties many current, solvent borrowers face in refinancing existing commercial real estate loans.
Businesses with a loan maturing in the next year who are current on all loan payments will be eligible. Lenders that are refinancing mortgages for existing customers will make a loan for up to 70 percent of the current property value; and SBA will help finance the remaining 20 percent. For new lenders taking on a refinancing project, SBA will take on a greater share of financing, up to 40 percent. SBA’s proposal for a temporary, zero-subsidy CRE refinancing program would be funded through additional fees for refinancing projects, not through a Congressional appropriation. This proposal will help refinance up to $18.7 billion each year in commercial real estate that might otherwise be foreclosed and liquidated.
2. Temporarily increase the cap on SBA Express loans from $350,000 to $1 million:
The President is proposing to temporarily increase the maximum SBA Express loan size to $1 million, which would expand the program’s ability to help a broad range of small businesses through a streamlined approval process. Unlike traditional 7(a) loans, lenders can use their own paperwork for SBA Express loans, which can be structured as revolving lines of credit. Currently, these Express loans are capped at $350,000 and carry a 50 percent guarantee. Fees would cover virtually all of the added costs of this proposal.
These proposals complement the President’s broader small business agenda – a key part of his overall jobs plan. The other elements of the small business agenda include:
- Extending small business expensing and bonus depreciation for 2010. Eliminating capital gains taxes for small businesses in 2010.A Small Business Jobs and Wages Tax Credit that would cut taxes for more than 1 million small businesses by paying up to $5,000 for every net new job and covers payroll taxes on overall wage increases in excess of inflation.
- A proposal to transfer, through legislation, $30 billion to a new Small Business Lending Fund that will support lending by community and smaller banks.
- Additional SBA lending proposals, including an extension of the Recovery Act programs that eliminate fees and raise guarantees on SBA’s two largest loan programs and permanent increases in the maximum loan sizes for major SBA programs.
U.S. Rep. Joe Donnelly, D-Ind., is sponsoring a dealer floorplan-financing seminar today in Elkhart, Ind., featuring officials from the Small Business Administration (SBA).
The invitation-only event is being staged at the Indiana University campus in downtown Elkhart and is aimed at RV and marine dealers and lenders.
SBA officials from Washington, D.C., Chicago and Indianapolis are scheduled to attend.
Other current and past national bank lenders, regional bank lenders and local bank lenders have been invited to join in on the discussion.
Several dozen people were expected to attend, according to a spokesman for the Donnelly staff.
President Obama will hold a town hall meeting today (Feb. 2) in Nashua, N.H., where he will outline the new Small Business Lending Fund. He will be joined by Small Business Administrator Karen Mills.
According to a White House statement, the Small Business Lending Fund will transfer $30 billion from the Troubled Asset Relief Program (TARP) to a new program that will support small business lending. The Small Business Lending Fund will be targeted at community and smaller banks that lend the most to small businesses, and offer incentives for banks to increase small business lending.
In the State of the Union Address, Obama outlined a series of proposals to create jobs and grow the nation’s small businesses. Last week, he outlined a new Small Business Jobs and Wages and Tax Cut to encourage hiring and create incentives for employers to increase wages for already existing employees.
Key elements of the new Small Business Lending Fund are below:
- Limited to Community and Smaller Banks Which Devote a Higher Share of Lending to Small Businesses: The Small Business Lending Fund would support lending among small- and medium-sized banks (with assets under $10 billion). These banks devote the highest percentage of their lending to small businesses in their communities, accounting for over 50% of all small business loans nationwide, even though they make up only about 20% of all bank assets.
- Program Would Be Separate and Distinct from TARP to Encourage Participation: By transferring, through legislation, $30 billion to a new program that would be distinct from TARP, the administration’s proposal would encourage broader participation by banks, as they would not face TARP restrictions.
- A Core Function of New Fund Would Be Offering Capital With Incentives to Increase Small Business Lending: The administration’s core proposal for the new lending fund is an initiative to invest in smaller banks capital under terms that provide strong incentives to increase lending. As participating banks increase lending to small firms compared to 2009 levels, the dividend paid to Treasury on that capital investment would be reduced.
- Administration Will Discuss with Congress Additional Ideas to Enhance Credit for Small Businesses Through the Small Business Lending Fund. While the Administration is presenting its plan to provide capital with an incentive structure to maximize small business lending, it looks forward to discussing with Congress other ways that – in addition to what is described above – the Small Business Lending Fund could be fully deployed.
Several federal initiatives to make Small Business Administration (SBA) loans more affordable, more flexible and more appealing to banks and businesses have been extended for two months after the program ran out of money because of its success.
New legislation signed last week by President Obama includes $125 million to maintain the enhancements for SBA lending under this February’s $780 billion American Recovery and Reinvestment Act, or ARRA, according to the Buffalo (N.Y.) News.
Those enhancements include higher government loan guarantees of up to 90% on the SBA’s primary 7(a) and 504 loan programs, as well as fee waivers on most of those loans. The original economic-stimulus legislation provided $730 million to the SBA, including $375 million to increase the guarantee and waive fees, but those funds were used up Nov. 23, the SBA said.
During the life of the program, more than 1,200 lenders came back to SBA loan programs, which provided more than $16.5 billion to small businesses. Weekly loan volume for the agency also increased by more than 75% when compared to the beginning of the year, before the stimulus.
The SBA now estimates that the added funding will support an additional $4.5 billion in lending.
“The extension of these programs through February is important to continuing our path toward recovery and will mean thousands more small business owners have access to the credit they need,” SBA Administrator Karen G. Mills said in a news release.
The extensions of the benefits, included in a Defense Department appropriations bill, authorizes the 90% guarantees through Feb. 28, while the fee relief extends until the funding is used up or the fiscal year ends, whichever is first. The guarantees returned to the usual 75% to 85% after the money was used up.
Loans that have already been approved are sometimes canceled or not funded for various reasons. So when funding ran out last month, the SBA created a Recovery Loan Queue so eligible small businesses and their lenders could put themselves on the list for an ARRA loan if funding became available.
There are currently 1,069 loans totaling $530 million in that queue. Those on the list will be the first to benefit from the new money, followed by new loan approvals starting today (Dec. 29), the agency said. Once the funding is used up, the SBA will restore the queue.
Any loans funded between Nov. 23 and today cannot get the benefits retroactively; nor can they be canceled and resubmitted. Other SBA programs under the stimulus act are not affected, including the agency’s America’s Recovery Capital loans or its microloans, the SBA said.
The higher guarantees and fee waivers are among several efforts by the agency and the Obama administration to free up credit markets and boost small businesses. Such firms are widely seen as the engine of the nation’s economy because they make up the vast majority of employers and generate nearly two-thirds of all new jobs.
However, small businesses have been struggling to get the credit they need to expand and add jobs because nonbank sources of capital dried up and fearful banks have sharply tightened their lending standards. Officials hope that by getting money into the hands of small businesses and spurring them to growth, they can drive a stronger economic recovery overall.
Among the most significant efforts were successful attempts to loosen up credit markets that had frozen a year ago because of fear about rising losses from bad loans. Through a credit line known as TALF, the Treasury Department and the Federal Reserve financed more than $1 billion in purchases of investment securities backed by SBA loans. Officials later unveiled a secondary market purchase program promising more liquidity for lenders if they made new loans.
The government also passed several tax cuts and other tax benefits in the stimulus law to add to businesses’ cash flow. And it has been monitoring small business lending by the 22 largest banks every month, with hopes of working with regulators to require all banks to report small business lending every quarter starting next year.
In addition, SBA expanded eligibility for its loan programs to more than 70,000 businesses through new size standards while supporting $30 million in floor-plan inventory financing for auto, recreational vehicle and boat dealerships.
And the administration announced initiatives to support small business lending by community-development financial institutions and to provide lower-cost capital to community banks that submit plans to increase small-business lending. Officials have also called for increasing the maximum size of SBA 7(a) loans to $5 million and increasing the guarantees for Section 504 loans.
Finally, a bipartisan group of U. S. senators has introduced legislation to allow credit unions to make more business loans. Under current law, credit unions’ business loans cannot exceed 12.25% of total assets. The bill would double that to 25% and increase the maximum loan to $250,000, from $50,000.
The credit union trade group projects that this would add $10 billion in business funding and yield more than 100,000 new jobs just in the first year.
“If we’re going to create new jobs and rebuild our economy for the long term, small businesses need more access to credit,” Gillibrand said in a news release.
The National RV Dealers Association (RVDA) requested several changes to the Small Business Administration’s (SBA) Dealer Floorplan (DFP) loan program designed to get SBA inventory financing loans to eligible dealers.
In comments filed with the agency today (Aug. 5), RVDA said that while the association “appreciates SBA’s recognition that RV dealers are struggling with wholesale dealer floor plan credit . . . RVDA requests that SBA consider revising its DFP rules and regulations to encourage more lenders to enter dealer floor plan financing.”
RVDA revealed its request in a new release issued this morning.
The DFP is a pilot program that began July 1 and is scheduled to expire in September 2010. DFP loans are available for a minimum of $500,000 up to $2 million and used to finance the purchase of floorstock for auto, RV and boat dealers.
”Despite the best intent of the SBA, RVDA and its dealers are finding that the details in the proposed regulations of the program are failing to encourage new lenders to enter into dealer inventory lending,” RVDA told the SBA.
Based on comments from dealers and RV finance professionals, in the press release RVDA made several recommendations it said are designed to make the program effective, including:
- SBA Must Loosen Restrictions on Eligible Lenders. SBA’s DFP initiative unreasonably limits potential lenders under its “eligible lender” criteria, which require many potential new floor plan lenders to have an established business relationship with the dealer. “The agency needs to begin by redefining eligible lenders to allow a significantly greater percent of the banks to participate. If the SBA can remove/diminish this hurdle, then the dealers and the industry can move forward with increased efforts to sell the benefits of dealer financing to the lending community,” RVDAtold the SBA.
- Maximum Advance for RV Inventory Loans Should be Modified. The SBA set up a two-tier system for advance rates and guarantees by the agency. New automobiles gain the benefit of 90% advance rates with a 75% SBA Guarantee. However, the SBA classifies RVs along with used cars, and allows only an 80% advance with the 75% SBA guarantee. ”RVDA does not find the SBA’s difference in advance rates justified. Lenders have always structured floorplan loans on motor vehicle inventory with the knowledge that it is a depreciating asset. Unlike the housing industry, the motor vehicle industry has always used common sense in its loans to protect against downside losses. We do not see a greater risk in RV inventory losses than there is with automobile inventory,” RVDA said.
- SBA Should Identify and Publish Participating Lenders. SBA could assist dealers and the RV industry by identifying lenders that are interested in making DFP loans. “A list of SBA lenders participating in the DFP program is vital to the credibility of the program and SBA,” RVDA said.
In the comments, RVDA also offered its assistance to SBA and the lending community to help make the DFP program a success.
”RVDA is extremely supportive of the SBA DFP program and recognizes its potential, to help our small business members. However, some structural barriers are apparent and need revision in order to stimulate lending activity. RVDA stands ready to help educate financial institutions on the benefits of lending to the RV industry,” RVDA told the agency.
At the upcoming RV Dealers International Convention/Expo, SBA representative Ed Brown and RV finance consultant Bill Thompson of Cardinal Points Network LLC, will conduct a workshop on SBA Dealer Flooplan Financing on Oct. 7. RVDA also has complete information on the SBA DFP program, including links to SBA regional offices, in the RV Lender’s Tool Box at www.rvda.org.
Editor’s Note: This column appeared in Monday’s edition of the Sarasota (Fla.) Herald-Tribune.
Floorplan financing may seem so “ho hum” to most of us. But if you drive an automobile, want to buy a boat or RV, the lack of it can severely crimp your choices.
That is because it is a line of credit that dealerships use to stock up on inventory. Without it, our “want it now” gratification would be put on hold until the dealer can get it from the manufacturer.
Procuring floorplan financing was not problematic until the automobile industry got into trouble, the economy tanked and credit got tighter than Scrooge’s piggybank. Lines of credit became harder to get.
The floorplan financing crisis came to my attention when I received e-mail from a small RV manufacturer and retailer in Southwest Florida. He has “25 years of manufacturing experience (and) maintained an impeccable track record with our bank.”
Yet, to continue providing floorplan financing, his bank representative got skittish securing it solely with the vehicles as collateral and asked him to pledge real estate as well.
Alternatively, the bank told him to find another lender.
This scenario is playing out nationwide.
“In recent months, we’ve seen a dramatic decrease in the availability of credit for financing dealership inventories,” says Karen Mills, administrator of the U.S. Small Business Administration (SBA). “We want to be a partner for these small businesses and help ensure they have the resources they need to help keep their businesses open, save jobs and survive these tough economic times.”
Thus, SBA launched its dealer floorplan financing program on July 1.
The program guarantees revolving lines of credit to lenders that make dealerships loans secured by inventory that can be titled, such as automobiles, RVs, manufactured homes, boats and trailers.
As the dealer sells each vehicle, the loan advance against that piece of collateral is repaid. After the loan is repaid, the dealer can borrow against the line of credit to add new inventory.
The loan amount ranges from $500,000 to $2 million, and SBA guarantees up to 75% against default.
Some lenders say that servicing floorplan loans are too management-intensive for the rates and fees SBA allows them to charge.
Dealers say they need more than $2 million to buy enough inventory.
Additionally, large banks prefer lending more that $2 million while many small community banks lack experience making floor plan loans.
So it is too early to tell if the well-intentioned SBA program will have an impact.
Meanwhile, the RV manufacturer mentioned above has taken his loan request to a higher authority within his bank. “It appears they are willing to work with us,” he told me.
When times get tough, relationship banking is often the best path.
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.
Beginning in this month, eligible RV dealerships can apply for SBA-guaranteed dealer floorplan (DFP) financing under the Small Business Administration’s new DFP Pilot Program.
The Recreation Vehicle Dealers Association (RVDA) and its allies supported this type of program, which follows the establishment of new eligibility standards that will allow hundreds of more RV dealers to apply for loans under the SBA program, according to an RVDA news release. RVDA however, would like to see more incentives, and the elimination of certain disincentives, so that more banks get involved in the SBA loan guarantee program.
Several dealers tell RVDA that lenders are not jumping on board to participate in the floorplan program. RVDA will submit federal comments requesting further revisions and bank incentives.
The DFP program will provide loan guarantees for lines of credit through its 7(a) program through Sept. 30, 2010, at which time an extension of the program will be considered. DFP loans will be made through SBA lenders only for “titleable” inventory, including RVs, autos, manufactured homes, boats and motorcycles.
DFP loans will be available for a minimum of $500,000 up to $2 million. With a maximum repayment term of five years, the loans will come with a 75% SBA guarantee for the first 80% of the DFP loans. Borrowers will also benefit from the temporary elimination of fees on 7(a) loans made possible by the America’s Recovery and Reinvestment Act of 2009.
It is important to note that lenders may now establish a higher advance rate. Lenders can advance the entire wholesale price of the units floorplanned. However, the SBA maximum guaranty to the lender will only be 75% of an 80% loan.
For example, if a lender has an advance rate of 100% for all inventory, the maximum SBA guaranty will be 67.5% for new automobile inventory and 60% for RVs and all other inventory financed by the lender. The lender will need to identify the advance rate and calculate the maximum allowable guaranty percentage for each loan on the lender’s application for guaranty.
RVDA will provide more details on the program to members as they become available.
Visit the RVDA Lenders Toolbox at www.rvda.org for more information.
Is there a change afoot in the RV finance arena that perhaps reflects an overall prospect for improvement in the U.S. economy and the recreational vehicle marketplace?
That’s hard to say. Based solely on the fact that Bank of America Dealer Financial Services and GE Commercial Distribution Finance — the two big dogs in RV finance — are talking to the press lately after months of silence during the depths of the recession, it’s certainly beginning to look that way.
Ellsworth “Ellie” Clarke, president of B of A’s Dealer Financial Services, last week provided an overview of B of A’s programs and the RV market in an interview with Jeff Kurowski, director of industry relations for the Recreation Vehicle Dealers Association (RVDA), that was posted on RVBUSINESS.com. And only yesterday (July 1), GE Commercial Distribution Finance’s Pete K. Lannon, managing director and president of GE Capital’s Motorsports and RV Group, addressed modifications to GE curtailment policies in a wide-ranging interview with RV Business.
Lannon also fielded questions on an array of other related topics, the crux of which is as follows:
What can you tell us about finance rates in general? We’re told that they spiked for GE in March across the board – including both the RV and marine sectors. Do you anticipate any sort of an easing of interest rates?
There are a lot of factors that go into interest rates. Part of it is the macro-economic environment, the general cost of funds and what it takes to raise funds in the marketplace. Another component is our cost of operations, and then there’s a risk component. So, we’re attuned to all of these items, and we would make rate adjustments in accordance with what they are telling us.
The Small Business Administration is beginning to provide floorplan financing for RV retailers. Has this played into any of GE’s decision, announced yesterday, to moderate its curtailment interest rates?
I think it’s a little early to see exactly how it (SBA financing) is going to be implemented. The SBA is still concluding its regulations, formulations, etc. I think any additional (financing) capacity in the industry for dealers certainly is welcome, particularly for dealers that are challenged. We just need to see what the final formulation is from the SBA. It’s still somewhat uncertain.
We’re told that GE occupies about a 25-35% share of the RV marketplace’s wholesale financing. Is GE looking to increase that share?
We have a significant share. I’m not going to speculate as to the exact amount, but we know we’re a significant player in the industry. We look to increase business that makes sense, that’s profitable for both us and for our dealers. Whether that leads to market share or not … we’re still dealing with an industry that’s been heavily impacted, and I think most of us are thinking more about just getting to the right size versus getting into a market share ‘game’ at the moment.
‘Right size’ could be applied to the RV industry as a whole. Do you feel that there may in fact still be too many dealers, as some have argued, for a downsize market?
I don’t know about too many dealers… What we’ve got is a situation (where) there’s still an imbalance of inventory in the field to the sell-through at retail. I don’t speculate whether it’s too many dealers. I do know that there’s too many units available right now. It’s depressing the sales prices of the inventory dealers are holding, and there just aren’t enough customers willing or able to make the purchase at the dealer level. We need a better balance for the industry to get healthy again.
So, GE’s decision to eliminate the interest hike isn’t necessarily a reflection of the company’s more confident outlook on the state of the industry?
We do have a fairly confident outlook. Let’s put it this way: we’re ‘cautiously optimistic.’ At this point, I don’t know if we’ve found the bottom quite yet, but if we haven’t, we’re awfully close. We’re seeing some positive indications in our RV business with the way inventory levels have come down, and dealer performance metrics are improving. They’re not healthy yet – we’re not prepared to make that statement – but we’ve seen a couple of months of upward trends in some important performance metrics that indicate that we think we are near, or have found, the bottom.
If you want to take a step up and look across the entire economy, Jeff Immelt, GE’s chairman and CEO, was quoted in London today (June 30) on behalf of GE with an outlook that said, “things seem to be brightening.” Again, I don’t think anyone’s prepared to say that things are where they should be or that they are absolutely healthy, but I think overall in a lot of areas besides the RV industry we are seeing signs of improvement on a lot of different fronts.
Another leading finance provider is telling the industry right now that they are in it “for the long haul.” Is GE?
We are going to continue to invest in and support this industry. We’ve been a very long-term player in this industry. When you think about the predecessor companies that were acquired by GE, we go back in the RV industry at least to the late ’70s, and our intention is to make sure that we are here through this cycle and back when the industry is healthy again. We want to be a participant in that.
The Small Business Administration (SBA) began accepting loan applications today (July 1) from RV dealerships for guaranteed floorplan loans under a new 15-month pilot program.
SBA officials, however, declined to predict when the money will start flowing.
”We expect there will be a ramp up period as we roll out the program,” said Eric Zarnikow, SBA associate administrator for capital access, during a telephone press conference. ”It’s difficult to know when the first loan will be made.”
SBA ”guidance” to lenders became available on Tuesday, he said, and he encouraged dealers to contact local lenders who likely already are qualified to make SBA loans and are familiar with SBA procedures.
”In recent months, we’ve seen a dramatic decrease in the availability of credit for financing dealership inventories,” SBA Administrator Karen G. Mills said in a press release. ”We want to be a partner for these small businesses and help ensure they have the resources they need to help keep their businesses open, save jobs and survive these tough economic times.”
The new program allows RV, automotive and watercraft dealers to establish revolving lines of credit ranging from $500,000 to $2 million, with SBA guaranteeing 60-75% of the loan, depending on collateral. Loans are to be repaid within five years.
The floorplan loans are available under the SBA’s 7(a) program, which typically guarantees 90% of the amount. SBA decided on the lower percentage because of the newness of the program.
”Given that this is a pilot program, there is some question about how these loans will perform,” Zarnikow said. ”We concluded that a 75% guarantee would provide encouragement to lenders without taking undue risk.”
Because it is a pilot program that expires Sept. 30, 2010, there is a 4,000-loan limit this year and next “We don’t expect to see that volume, particularly in 2009,” Zarnikow said.
The SBA will decide next year whether to extend the pilot program beyond its expiration date.