The state of inventory finance
Some of the industry’s biggest lenders departed during the recession, but today’s crop of finance providers are optimistic about the marine market.
The use of floor plan finance is near universal in the marine industry, which is why the exit of a number of notable players as the recession hit in 2008 left a sting that many dealers are still feeling today.
However, times have changed again, and the outlook of lenders has switched from dire to optimistic.
“Things are very good right now,” says Bruce Van Wagoner, president of the Marine Group at GE Capital, Commercial Distribution Finance. “Credit is available to qualified candidates.”
Eric Hurst, a vice president at used vehicle floor plan provider Dealer Services Corporation, puts it even more emphatically.
“I’d say that right now floor plan finance is active and robust,” he says. “There’s plenty of money available, depending on the business structure of the individual seeking it.”
The trick for dealers, as with any business loan, is justifying why someone should invest in your company.
GE remains the largest player in marine inventory finance, but as the market has improved, they are seeing increasing competition. Van Wagoner says that’s good news for everyone.
“Competition is always good — it keeps us stronger,” he says. “It forces us to be sure we’re doing all we can to justify why people are doing business with us.”
That competition includes other national lenders who have served the industry both before and after the recession, such as Bank of the West, as well as newer entrants like Northpoint Commercial Finance, which features a number of former Textron Financial executives, and TCF Inventory Finance, home to many veterans of former providers Borg-Warner/Transamerica and ITT/Deutsche. Other options, such as Dealer Services Corporation, which was purchased by auction company Manheim in January, don’t seek marine business but work with clients on an individual basis.
The new reality
Despite a rosier outlook for the industry, lenders didn’t go through the recession without learning some lessons, one of which is to monitor inventory levels very closely. In today’s climate, stocking a boat in every color may no longer be an option.
“In the marine market, lenders have become more conservative,” says Michael Lax, Bank of the West senior vice president and executive in charge of the Dealer Financial Services group. “Lenders are more focused on quality of dealers’ inventory and ability to turn it, rather than sheer size of inventory levels.”
That’s in large part because many dealers got saddled with excessive inventory when the recession unexpectedly struck. As Lax put it: “They woke up one day and they had loads of inventory, and it turns out that inventory wasn’t valued at what they bought it for, let alone what they could sell it for.”
By some estimates, nearly a third of all new boat sales locations went under or consolidated, and those that survived spent years trying to clean up their inventory.
“There was excessive aging in the market, slow turns,” Van Wagoner says. “The impact was felt not only due to dealer failure but a lot of consumer repossessions that came back onto the market. So a lot of boats sold during that downturn were distressed product.”
Fortunately, the channel seems to have cleared out, with industry data from companies like Info-Link showing aging near historic lows. Nevertheless, lenders warn that dealers must continue to monitor their inventory closely. Keeping inventory turns rapid means less interest expense, less carrying costs and less exposure to any reduction of value in the inventory.
“The dealer that is managing his inventory with precision and turns his inventory quickly is really the dealer that’s going to succeed and attract capital from banks,” Lax says.
Getting a loan
Lenders say the secret to obtaining floor plan financing really isn’t a secret at all. It’s all about having a solid business plan and demonstrating that your business can turn a profit.
“Any time businesses are undercapitalized or they lack experience or they don’t have a viable business plan well prepared, they’re going to struggle to obtain a floor plan,” says Van Wagoner. “However, businesses that secure commitments from good manufacturers can normally succeed in establishing a workable level of inventory financing.”
Having a formal business plan is a good first step, but the bottom line is that dealers need to be able to communicate what makes them a good investment.
“As they want to communicate with lenders, it’s important that they consider their inventory turns, their aging, and that they’re showing profitability,” Lax says. “Some dealers try to minimize their profits and reduce their taxes, and that’s a good strategy. But at the same time, lenders want to see some profit.”
How to select a finance provider
Financing today is more than a provider giving a dealer a loan and a dealer making a payment. Hurst says dealers must also look at what else their lender can do for them, including the ties that different companies have created in the industry to make product more available as well as their ability to get that product on the books seamlessly without a lot of added burden on dealership staff.
“Cost is always relevant to the business,” Hurst says, “but dealers need to be very cautious about what they’re getting when they spend their dollars.”
Some providers, he says, may offer a significantly lower cost of funds but provide a lower level of service.
“You’re going to spend that money in administrative funds just to manage the relationship,” he says.
Russell Baqir, vice president of business development at Northpoint, also recommends that dealers don’t limit themselves to a single flooring source.
“There are alternative lenders in the market and as history has proven having an alternative provides additional capacity in times when lending becomes scarce,” he says. “In addition, as the market continues to stabilize and improve, increase in demand will increase the need for additional flooring.”
The goal is for dealers to find a lender or lenders that fits their individual needs. Northpoint, for example, is initially focused on smaller dealers, an area it believes has been underserved by traditional banks.
The best way to find out about what these companies offer is to ask. Most host marketing events or attend industry trade shows specifically to answer questions and, depending on their marketing structures, also have representatives who would be happy to set up an individual meeting or phone call with prospective clients.
In addition, Van Wagoner recommends dealers seek advice from more experienced dealers and their manufacturing partners in addition to industry reps.
Every major floor plan lender has invested in a system that allows dealers to quickly monitor and pay for inventory online, and these systems have revolutionized the industry through both the convenience of 24/7 access as well as a wealth of information for both daily and long-term business planning.
These services are even starting to go mobile, with new features like texts that inform dealers when payments are due.
According to Ross Perrelli, president and CEO of TCF Inventory Finance, technology also provides tools to make the lenders’ employees far more productive than in the past, allowing them more time to focus on providing dealers with exceptional customer service.
GE has also invested heavily in recent years in producing business intelligence that it shares with its dealers and manufacturers to help them navigate the current market and understand their customers better.
That information combined with modern technology has led to more healthy interaction between dealers and their manufacturers, who are more invested than ever in the success of their dealer networks.
“They can’t just go across the street and find another dealer, so now they’re very engaged with their customers, working closely and making sure that they’re healthy,” Van Wagoner says. “And I think that’s a great sign.”
Baqir of Northpoint is among the lenders who see good things on the horizon for the marine industry due to the current scarcity of used inventory, a rise in consumer confidence and an increase in new home purchases.
Peter Kelley, president of TCF Commercial Finance Canada and general manager of TCFIF’s marine division, agrees, saying that no matter what the economy has wrought over the past 4 or 5 years, he believes the marine industry will rebound well as the economy recovers and people feel more confidence about discretionary spending.
“This industry always seems to bear the brunt of the worst of bad economic times,” he says. “Whether it was the gas crisis in the 1970s, periods of extraordinarily high interest rates like the late 1980s, or any of several recessionary downturns over the past few decades, this industry always seems to be among the hardest hit. Yet there’s something very strong in the consumer psyche that drives them back to boating as soon as they are in a position to do so. This last few years has been particularly stressful, but we see industry survivors that have repositioned themselves for success as soon as the economic picture improves just a bit, and we want to support that success and share in it.”