During this economic climate, it is vital to establish and maintain strong communication and a mutually-beneficial relationship with your floor plan lender. Now more than ever, managing this relationship as one of your most important business alliances is in your best interest.
Good Communication Is Important
Good communication is vital in any partnership, and many dealers overlook this. A level of trust needs to be established between borrowers and floor plan lenders. It’s also important to view the relationship from your floor plan lender’s perspective. Knowing your lender’s business and how it operates can eliminate misunderstandings before they happen.
Understanding Your Loans
The importance of understanding your loans may seem obvious, but what you don’t know really can hurt you. Dealers often don’t understand all or parts of their loan agreements, and are taken by surprise when covenants they didn’t know existed are invoked. For example, a dealer may be declared in default in spite of having always been current on loan payments. These “technical defaults” kick-in for a wide array of reasons – all of them delineated in your lender’s contract, but which you may not realize are there.
It’s also important that you understand what has changed in reaction to the current environment. You should expect to see increased diligence by your bank. They will dig deeper and further back and try to really understand the operations and how things move forward. You will also see a push for increased equity in the transaction, perhaps for more frequent payments so there isn’t so much debt on the cars as they age. Lenders want to be more ‘secure’ now in order to provide the same service due to the stress the lender feels and the risk they are taking. This might translate into higher rates and fees, which is a function of the market place.
You should also expect to see a push for co-borrowers and/or guarantors. You will need to balance how you can provide the appropriate level of collateral without exposing the borrowers to too much risk. Lenders will tend to be more flexible when they truly understand your business. Lenders want to work with you – they don’t want to foreclose, they don’t want your inventory and they don’t want the real estate. They would prefer to work it out with the borrower and move forward or slowly exit the relationship with the least cost and risk.
What Financial Measures Are Important to Your Lenders
Loan covenants are very common and are a reality in today’s environment. They are not new, but they are often misunderstood and historically may have been overlooked. There is a misperception out there that covenants are there to help the lender or to position the lender with leverage in case of potential issues.
Dealers often look at measures like paying regularly, paying on time, or the fact that they are making money as a measure of financial health. While these measures are important, they are not the key measure. The following measurements are key to lenders: liquidity to working capital ratio, inventory turnover, tangible capital to leverage ratio, debt to net worth ratio. Lenders are also interested in your fixed costs and discretionary expenses. It is important to be transparent with your lender. Share your annual plan, provide timely financial data, maintain accurate financial records and communicate large or unusual items.
What To Do If Your Lender Ends Your Relationship?
What should you do if your lender ends the relationship or exits the floor plan lending business entirely? You need to understand the reasons why. Is it a strategic portfolio decision or is it a result of something you did or didn’t do? Is it related to a default or a specific manufacturer’s brand?
How do you position yourself for the next lender? You need to prepare a business plan or information packet for the new lender. They will eventually want this information, and providing it up front will help facilitate the process. Include a summary of the dealership ownership and management structure including names, salary information and key responsibilities. Provide a list of franchise types and locations and material operating practices. Detailed financial information including current and proposed financial needs is essential.
Make access to credit a high priority. You’ll need to look for both short term and long term solutions. Be ready if you have to settle for more stringent terms and conditions and consider all the options including multiple lenders.
To help our members build a solid relationship with their floor plan lender, AIADA together with our Affinity Partner, KeyBank, recently hosted a webinar entitled “Building a Win-Win Relationship with your Floor Plan Lender”.
In the webinar we provided actionable suggestions that are highly relevant to auto dealers. The webinar was moderated by Gregg Strong, president of Key AutoFinance. Stephen Dietrich, Attorney and Shareholder at Greenberg Traurig, and Edmund Reinhard, CPA and Partner at Crowe Horwath, joined him as panelists. Their combined expertise in the fields of auto lending, finance, law, mergers and acquisitions, restructuring, accounting, taxes, and benefits makes them a valuable resource that can help you build a more positive relationship with your floor plan lender.click here.